Confused Tax question

[old.user4556]

I have a taxing (HRHRHRHR!) question about tax.

Tax free allowance for Joe Average in the UK is £7475 (2011 figure).

Everything between £0 and £37400 is taxed at 20%
Everything between £34107 and £150000 is taxed at 40%

I pay company car tax and preferential loan rate tax (staff rate mortgage at 0.5%, Bank of England base rate tracker) which has essentially eroded my personal allowance away to zero.

This means that instead of me getting the first £7475 tax free, I pay the first £7475 at 20%? ... or some at 20% and some at 40%? (I'm in the 40% bracket btw).

 

[Vae]

If you don't have any tax allowance left (your code is actually zero rather than an L or a negative (K I think) tax code) then you just start at the basic rate (20%) band so have £35,000 taxed at 20% then your remaining income at 40%.

This effectively means that, since you are in the higher tax bracket already, that the benefits reducing your allowance to zero are paying tax at 40%.

 

[old.user4556]

I'm actually in negative now since I'm due HMRC tax.

I'm not sure what you mean by your second sentence? Can you put that in noob speak?

 

[Vae]

Ok 3 scenarios:

1) You earn 50k with no benefits so have a 747L tax code. 7,475 is tax-free, 35,000 is taxed at 20% and 7,525 taxed at 40%. Tax bill = 10,010

2) You earn 50k with a 0L tax code (i.e. no allowance). 35,000 is taxed at 20% and 15,000 at 40% (so compared to scenario 1 the 7,475 you would have had tax-free is being taxed at 40%. Tax bill = 13,000

3) You earn 50k with a tax code of 500k (which is a negative tax-code). 35,000 is taxed at 20%, 15,000 at 40% and then also pay tax on an additional 5,005 notional income (because the 500k tax code is equivalent to 5,005 income) at 40%. Tax bill = 15,000

Hope that makes sense.

 

[Deebs]

I thought that no matter what the first xxxx of your taxcode is tax free.

 

[Vae]

Nope all your allowance can go and then some more if your benefits (or underpaid tax from previous years) exceed the size of your allowance.

 

[old.user4556]

Yeah, that's ok if you actually have a tax free allowance Deebs, but I need to pay tax on my subsidised loan which reduced it. Then I started paying company car tax, which reduced it even more (essentially to a negative number), then HMRC cocked up my tax and I was due the tax man nearly £2000 which they need to claw back. Therefore, because I owe a shitload of tax, I get no tax free allowance .

Vae, that makes sense, so because I earn some income at 40%, then I basically need to pay my chunk at 40%? Fuck.

I'm going to become a cocaine dealer I think.

 

[Deebs]

Eh? I thought that any tax you owed was on anything over the limit, and it could dip into your tax allowance and therefore reduce that.
Btw, Company Cars suck when it comes to tax, better off taking the money.

 

[old.user4556]

Deebs I've had that argument with Wij, I've done the sums and it's soooo much better to get the car.

 

[Deebs]

Deebs I've had that argument with Wij, I've done the sums and it's soooo much better to get the car.

Show me the math!

 

[old.user4556]

Too much lager. Maybe tomorrow.

 

[Zenith.UK]

Show me the math!

My company car and personal fuel allowance wipe out about £5800 of my tax allowance.
20% of £5800 = £1160
£1160 / 12 months = £96.67 per month I pay extra as tax for the privilege of driving a company car.

How much does it cost to run and maintain your own car?
Insurance? £30/month? £50/month? £100/month?
Fuel? The price per litre goes up and up and up.
Maintenance? A few hundred a year to service and MOT your car.
Tax disc? £200 a year or so for most cars.

For me, it is cheaper to pay £96/month extra tax and have a fully expensed car than to run and maintain a car myself.

 

[old.user4556]

For me, the benefits are:

- no deposit on the car
- no whopping APR on the finance
- fully maintained, taxed and insured (including my parents and my bird) regardless of racking up a huge mileage
- complete peace of mind motoring. Burst four tyres? replaced gratis!
- the ability to get a very nice brand new car every four years
- only have to pay towards the car for three of the four years

There is no danger I'd get a brand new beemer for the same money if I chose to finance it privately.

Granted, if you've got a cheaper car that you're happy with (say, a nearly new Focus or Astra for example) then it makes no sense to chuck that and finance an expensive car; you may as well take the money.

 

[Lamp]

When I was a manager-grade employee (years ago) company policy was to pay cash instead of a car (too many managers & company too big to give everyone a vehicle). Cash was essentially a pay rise & added to salary. Now I'm a director, I've lost my car money but get shares in the bank instead. With my personal portfolio, end of year tax returns are a nightmare.

 

[MYstIC G]

I had a similar issue when I borrowed the deposit money for my house from our family business.

Our accountants got rid of the problem by having the company charge me interest on the loan. This reduced (not eliminated) the tax on the loan and did mean I owed the company slightly more money but it was better than paying 40% on the nose for the lump.

Vae probably understand this better than I do, I just rely on our accountants advice.

 

[Wij]

I'm currently on a non-cumulative tax code and got paid my first six weeks of pay all within a few days of each other. I got less than 40% of the sixth week's pay. Grrrrrr.