Company car tax

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b9boy
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Company car tax

Post by b9boy » Thu Mar 02, 2017 8:50 pm

Hoping someone on here can help with a definitive answer on this from a position of sure knowledge.

The other half's company car is due to go back soon.

She needs to decide whether to get another one or opt out.

That's easy enough but her tax band is pretty sure to change soon.

So, assuming she moves into the higher rate of tax (40%) what happens?

Year 1 (this year) she will be paying company car tax at the lower rate because the tax man doesn't know she will tip over the higher rate as the year gets towards the end.

Year 2 the taxman realises she is now a 40% payer and does what? Does he back charge her for year 1 so she gets hit doubly hard in year 2?

If the latter is true it probably doesn't make sense for her to take a car.

Thanks in advance.
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PerryGunn
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Post by PerryGunn » Thu Mar 02, 2017 9:48 pm

If she enters the 40% tax band this year then the inland revenue will charge any taxable benefits for this year at 40% - this will take a few months to catch up with her but, once it does, she's likely to receive a tax code change to reclaim the unpaid tax via next year's PAYE system - they could potentially send a demand for it to be paid in a lump sum

It doesn't matter what rate you start the tax year at, if you earn enough during the year to be a higher rate payer that's the rate for the whole of that tax year - PAYE avoids having to pay tax for the whole tax year in one lump sum but requires an estimate of your annual earnings at the start of the tax year in order to pay the correct amount of tax each month. If the initial estimate of earnings is wrong and this takes you into (or out of) a higher rate band, an appropriate adjustment has to be made - either a tax demand for underpayment or a tax refund in the case of overpayment

One way to avoid this, especially if she's only likely to go over the threshold by a small amount is to make an additional payment into her pension - either a personal pension or, if in a company scheme, ask to perform a salary sacrifice to avoid going over the threshold (this will also save on NIC contributions for both employer and employee)
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Hodge
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Post by Hodge » Thu Mar 02, 2017 10:01 pm

I think you have the answer from Perry, but the typing had already been done this was my take.

Not clear whether she is going to go into higher rate tax towards end of tax year due to receiving some other income or the change of car but it doesn't matter how or why.
Changes of company cars - employers are meant to notify HMRC of the change. HMRC will then update the taxpayers PAYE code and tell the employer to operate the new code the the RTI system ( codes uploaded to the employers PAYE software) to ensure tax payers pay correct tax in year.
If it's because of a bonus or pay rise that will be dealt with through PAYE system and the employer should collect the correct mount of tax in month. This is assuming she is on a cumulative tax code (ending L). If she is on a M1 or T code, the system can't collect the tax and it will become payable after the year end.
Tax is cumulative, so if incorrect tax has been paid in the year for whatever reason, it will all be recalculated after the year end and you will get a bill if you have underpaid. Depending on the amount underpaid you may be able to add to the following years tax code and therefore spread over a year. Lot of press on recent years about HMRC issuing tax demands because coding notes incorrect in year. They have been better this year with the RTI system seems to be working.
If she becomes higher rate, she will only pay higher rate 40% tax on the amount that goes over the threshold. So for 16/17 broadly speaking, the first £11,000 is zero rate, the next £32,000 is at 20% and over £43,000 is at 40% up to £100,000 when things change again. If you have children you should be aware that if either partners income is over £50,000 child benefit will begin to be abated.
I could go on for ever with more facts and what ifs

But you get the idea

Hope it all helps

Cheers
Mark Hodge

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b9boy
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Post by b9boy » Fri Mar 03, 2017 10:36 am

Thanks for the replies.

Just to be clear then if she drops into the higher tax and at ANY point in the year she ends up having to pay for the entire years car tax at the higher rate?

Suspected that would be the case but good to have it confirmed.

Looking like she might opt out in this case.
NOW
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1994 E34 B10 Bi-Turbo #472 Black/Gold stripes
1993 E36 B2.5 Mauritius Blue
1983 E28 B9 3.5 Black/Gold stripes (ex-press car)

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Post by MichaelC » Fri Mar 03, 2017 7:53 pm

b9boy wrote:Thanks for the replies.

Just to be clear then if she drops into the higher tax and at ANY point in the year she ends up having to pay for the entire years car tax at the higher rate?

Suspected that would be the case but good to have it confirmed.

Looking like she might opt out in this case.
Tax is based on overall income for the year. Period.

So, if all sources of income including the value of the benefit in kind exceed the basic rate limit that element in excess of the basic rate limit is subject to tax at the higher rates.

Any additional tax arising in respect of the benefit in kind may either be coded out or alternatively paid 31 January following the end of the tax year.

Ah, the joys of being self employed - none of this bink nonsense.

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Post by b9boy » Fri Mar 03, 2017 9:39 pm

MichaelC wrote:
b9boy wrote:Thanks for the replies.

Just to be clear then if she drops into the higher tax and at ANY point in the year she ends up having to pay for the entire years car tax at the higher rate?

Suspected that would be the case but good to have it confirmed.

Looking like she might opt out in this case.
Tax is based on overall income for the year. Period.

So, if all sources of income including the value of the benefit in kind exceed the basic rate limit that element in excess of the basic rate limit is subject to tax at the higher rates.

Any additional tax arising in respect of the benefit in kind may either be coded out or alternatively paid 31 January following the end of the tax year.

Ah, the joys of being self employed - none of this bink nonsense.
Cheers for that :D

To be fair when I have to do my tax return each year I find it a really stressful period so god only knows what it's like for a self employed person? Do you just chuck receipts at an accountant and leave them to it - surely youvget dragged into it?

The whole company car thing was easier I think until the government changed the goalposts on Hybrid/EV vechicles. Now even a BMW 330e stars to look expensive for her :(
NOW
1983 E28 B9 3.5 Alpine White

PREVIOUSLY
1994 E34 B10 Bi-Turbo #472 Black/Gold stripes
1993 E36 B2.5 Mauritius Blue
1983 E28 B9 3.5 Black/Gold stripes (ex-press car)

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Post by jamesa » Fri Mar 03, 2017 11:06 pm

In my experience ... accountants are not always the optimum tax advisers, try a specialist tax adviser.
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Post by MichaelC » Sat Mar 04, 2017 2:14 am

jamesa wrote:In my experience ... accountants are not always the optimum tax advisers, try a specialist tax adviser.
Tread with care!

If one wants to mitigate tax there are ways and there are ways.

Lines blur.

Its easy to cross those lines without realising. Who bears the price?
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The correct answer is, the tax payer. Not the adviser.

My words of wisdom.

If seeking an opinion, get a second opinion if not a third. If something sounds too good to be true, the chances are it is.

Other words of advice: keep it simple, contrived if not a route to additional layers of cost will likely fail in this day and age, use the reliefs available.

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