When does the 40% tax bracket work for the better?
Discussion
My wife is at the very limit of the lower tax bracket and has been sounded out about a new job; this time in the 'mid 40s'.
Currently her company car is a £28K A3 1.6 diesel, economical and low on BIK, her commute is 100 miles per day of which she covers the fuel cost.
Realistically at what point would moving into the 40% show a clear difference to what she is currently earning?
BIK on car would increase although the new potential job is 'field based' which could help with fuel costs. Given that she is happy in her current role and doing well financially it would really have to add up.
Currently her company car is a £28K A3 1.6 diesel, economical and low on BIK, her commute is 100 miles per day of which she covers the fuel cost.
Realistically at what point would moving into the 40% show a clear difference to what she is currently earning?
BIK on car would increase although the new potential job is 'field based' which could help with fuel costs. Given that she is happy in her current role and doing well financially it would really have to add up.
I think you're getting two things mixed up here, your wife's BIK won't change with her tax bracket.
To keep things simple:
If your wife took the new job, kept the same car, drove the same distant to work and paid her fuel as she does currently; then all that would happen is she would earn more money based on the salary increase.
To split things up:
PAYE Tax
With the new job, anything your wife earns up to £31,866 is taxed at 20%. Anything above that is taxed at 40%.
So if she is going from £35k a year to £45k a year, she'll earn an additional £6,000 a year after tax.
BIK Tax
If your wife is on the same company car scheme as she is currently, then BIK tax will change based on car value and C02 emissions. If she is getting a fuel card which covers her work mileage, then she won't be able to claim her mileage back from the tax man, so she will just be paying for her private miles/commute. If she is getting an 'all inclusive' fuel card (company pays for all her fuel), she will get taxed on this.
HTH
To keep things simple:
If your wife took the new job, kept the same car, drove the same distant to work and paid her fuel as she does currently; then all that would happen is she would earn more money based on the salary increase.
To split things up:
PAYE Tax
With the new job, anything your wife earns up to £31,866 is taxed at 20%. Anything above that is taxed at 40%.
So if she is going from £35k a year to £45k a year, she'll earn an additional £6,000 a year after tax.
BIK Tax
If your wife is on the same company car scheme as she is currently, then BIK tax will change based on car value and C02 emissions. If she is getting a fuel card which covers her work mileage, then she won't be able to claim her mileage back from the tax man, so she will just be paying for her private miles/commute. If she is getting an 'all inclusive' fuel card (company pays for all her fuel), she will get taxed on this.
HTH
Income tax is a progressive tax - so there is not a point where earning extra takes a big chunk out of your earnings now.
Stamp Duty on house sales is a regressive tax so if you pay £249,999 for a house you pay x% of that in stamp duty but if you add £1 to the price of the house it just about doubles the tax (much more than the extra £1).
With a progressive income tax then if you are £1 below the 40% income tax rate one month and at the limit the next month then your take home will be £(1 - 0.40) more (ignoring the effect of stamp duty etc.
Company car tax is just treated like any other income, it is calculated on the value of the vehicle (and fuel etc.) so that you are deemed to be earning (say) £300 per month extra and pay tax on that, if it puts you over the 40% threshold then you will pay an extra £300 * 40% = £120 in tax.
Does this answer the question you asked.
Stamp Duty on house sales is a regressive tax so if you pay £249,999 for a house you pay x% of that in stamp duty but if you add £1 to the price of the house it just about doubles the tax (much more than the extra £1).
With a progressive income tax then if you are £1 below the 40% income tax rate one month and at the limit the next month then your take home will be £(1 - 0.40) more (ignoring the effect of stamp duty etc.
Company car tax is just treated like any other income, it is calculated on the value of the vehicle (and fuel etc.) so that you are deemed to be earning (say) £300 per month extra and pay tax on that, if it puts you over the 40% threshold then you will pay an extra £300 * 40% = £120 in tax.
Does this answer the question you asked.
The Beaver King said:
I think you're getting two things mixed up here, your wife's BIK won't change with her tax bracket.
Well, the BIK won't change, but the way people see car BIK (as an adder on top of their salary) means that the amount of tax paid appears to double (assuming the pay increase is enough to put the whole BIK value over the threshold).It's the point where opting out of the company car starts to get complicated. At 20% taking a company car is a no-brainer, at 40% it needs some thought.
My (completely wrong?) understanding of BIK is that for a given value it increases when you cross into the higher bracket.
e.g £100 BIK would become £200 BIK.
Which is why I'm wondering if there is a point where you could actually be worse off in the higher band.
Fuel is fair old expense at the moment, ~£400 per month spent on commuting, house location and her narrow industry dictates that though.
e.g £100 BIK would become £200 BIK.
Which is why I'm wondering if there is a point where you could actually be worse off in the higher band.
Fuel is fair old expense at the moment, ~£400 per month spent on commuting, house location and her narrow industry dictates that though.
TheFungle said:
My (completely wrong?) understanding of BIK is that for a given value it increases when you cross into the higher bracket.
e.g £100 BIK would become £200 BIK.
Nope - effectively the BIK value is added to salary (actually it's taken off your tax free allowance). If that takes you £1 over the 40% threshold then you'd pay 40% on £1.e.g £100 BIK would become £200 BIK.
The Beaver King said:
PAYE Tax
With the new job, anything your wife earns up to £31,866 is taxed at 20%. Anything above that is taxed at 40%.
So if she is going from £35k a year to £45k a year, she'll earn an additional £6,000 a year after tax.
40% tax at £32k?With the new job, anything your wife earns up to £31,866 is taxed at 20%. Anything above that is taxed at 40%.
So if she is going from £35k a year to £45k a year, she'll earn an additional £6,000 a year after tax.
I don't think you've included the personal allowance
It does work for your benefit if you have a car allowance rather than company car and claim back mileage from HMRC. If I get 20p from my company per mile, I can then claim 20% of the remaining 25p of the 45p set by the government. If I was in the 40% tax bracket, I can claim back 40% of the remaining 25p from HMRC. When you multiply this by 10,000 miles, it makes quite a big difference.
NPI said:
MrPicky said:
That's not you benefitting, that is your employer profiting from you. Press for the full 45p from him.
It's not normal to get the full rate is you also get a fixed monthly allowance.If you ARE a 40% (or even a 45%) tax payer, then it is worthwhile making sure that you are making best use of any tax reliefs that you may be entitled to.
The example given above is the fact that a person who is receiving less than the 45p mileage rate from their employer is able to make a tax relief claim for the difference from HMRC. This applies to all taxpayers of course but works out more beneficial for those paying tax at higher rates.
Other areas where further tax relief my be due are -
charitable giving
pension contributions
losses from trading activities
If an employer operates any "salary sacrifice" schemes - such as "child care vouchers" or "bicycle to work", then there may be some scope for decent tax reductions available.
The example given above is the fact that a person who is receiving less than the 45p mileage rate from their employer is able to make a tax relief claim for the difference from HMRC. This applies to all taxpayers of course but works out more beneficial for those paying tax at higher rates.
Other areas where further tax relief my be due are -
charitable giving
pension contributions
losses from trading activities
If an employer operates any "salary sacrifice" schemes - such as "child care vouchers" or "bicycle to work", then there may be some scope for decent tax reductions available.
Polariz said:
NPI said:
MrPicky said:
That's not you benefitting, that is your employer profiting from you. Press for the full 45p from him.
It's not normal to get the full rate is you also get a fixed monthly allowance.Gassing Station | Jobs & Employment Matters | Top of Page | What's New | My Stuff