A 'taxing' question for Eric Mc

[johnfm]

Eric

I am trying to correctly apply the tax rules to 'grossing up' a net car benefit for a company car issue.

Lets say after taking into account Approved Mileage Allowance Payments, fuel benefits etc an employee needs a net payment of £340 to leave him 'neutral'. Assume the driver is 40% tax payer and 1% NI.

Gross up the £340 for PAYE @ 40%, ie £340 x 100/60 = £566.66

Next, gross up for EMPLOYEES NI @ 1%, ie £566.66 x 100/99 = £572.38 (i.e. NI is £5.72)

So, gross payment to employee is £572.38.

EMPLOYER NI is 12.8% of this ( ie £73.26)

HOWEVER, do I need to treat the EMPLOYEES NI ( of £5.72) as a benefit in kind and tax it AGAIN at 40%

I have had two different opinions on this.

What's yours?

[smartie]

no.

[johnfm]

Hi Smartie

Is that 'no, it is not a benefit in kind so I do not need to tax it again'


I can see why a tax advisor would percieve it as a B-I-K, as the employer is sort of paying it - but on this basis you would have to apply it to normal employees NI as well, I suppose.

[smartie]

the benefit os whatever it is, ie the car,fuel allowance etc.

You are just paying him more to allow for this, but it is still essentially just more salary, so the er's NI is not a benefit.

Edited by smartie on Wednesday 15th October 22:42

[johnfm]

Bumped for Eric Mc! I see you are back online!

Any views. I'm with Smartie - I think our 'tax advisor' has got it wrong.

[CaptainSlow]

no, it will be taxed as part of his salary

[johnfm]

Just to add - I think the two stage grossing up method he has suggested is totally wrong too.

If a 40% tax payer and 1% NI payer, it should just be


£340 / 0.59 = £576.27

Gives NI@1% = £5.76

PAYE @ 40% = 230.51


Net = £576.27-230.51-5.76 = £340.

I claim our 'tax advisor' is a dithering idiot!!

[CaptainSlow]

johnfm said:

Just to add - I think the two stage grossing up method he has suggested is totally wrong too.

If a 40% tax payer and 1% NI payer, it should just be


£340 / 0.59 = £576.27

Gives NI@1% = £5.76

PAYE @ 40% = 230.51


Net = £576.27-230.51-5.76 = £340.

I claim our 'tax advisor' is a dithering idiot!!

yeah I agree with you there, they are independent charges so should be done in isolation on the gross figure

[johnfm]

Thanks CS

This advisor needs a kick in the arse.

He firstly suggested that dividing by 0.59 is the incorrect way to gross up for a 40% paye and 1% NI payer.

Then, he suggested that if a company grosses up a net payment (ie net monthly payment to cover car costs for an ECO compnay car scheme), the Employees NI element would be subject to a further round of tax as a BIK AND the PAYE tax paid would be subject to a further round of NI.

Can I suggest that this guys is just plain wrong?

[CaptainSlow]

johnfm said:

Thanks CS

This advisor needs a kick in the arse.

He firstly suggested that dividing by 0.59 is the incorrect way to gross up for a 40% paye and 1% NI payer.

Then, he suggested that if a company grosses up a net payment (ie net monthly payment to cover car costs for an ECO compnay car scheme), the Employees NI element would be subject to a further round of tax as a BIK AND the PAYE tax paid would be subject to a further round of NI.

Can I suggest that this guys is just plain wrong?

I agree he incorrect dismissing /.59 calculation (he has done /.594 as he has reduced the 1% NI by 40% which he shouldn't as they are independent)...however he is correct in regards to the second part - just hasn't explained it well.



edited due to misread

Edited by CaptainSlow on Tuesday 21st October 15:46

Edited by CaptainSlow on Tuesday 21st October 15:48

[johnfm]

I have had a couple of differing reports re: the 'extra round' of NI and tax.

IF an employer pays our fictitious employee £576.27 in addition to his normal monthly salary - how is there a BIK? Where would it end? Why would this 'BIK' treatment not apply to his 'normal' salary?

[CaptainSlow]

johnfm said:

I have had a couple of differing reports re: the 'extra round' of NI and tax.

IF an employer pays our fictitious employee £576.27 in addition to his normal monthly salary - how is there a BIK? Where would it end? Why would this 'BIK' treatment not apply to his 'normal' salary?

ok there is no extra BIK on top of this, but if you think about it he will be paying NI on the extra amount to compensate for the additional income tax and he will be paying income tax on the extra amount to compensate for additional NI.

In simple terms he will be paid an extra £576.27 as salary and will pay tax and NI on that accordingly, end of.

[johnfm]

Thanks Captain

I had this tax/payroll advisor suggesting that because they are BIKs, there would be a further:

40% PAYE on the £5.76 NI payment (because the employer is paying it)

so a FURTHER 3.84

This then would increase the 12.8% employers NI - as the gross payment to the employee is now higher.

I am beginning to think the guy is a muppet and have suggested we seek second opinion IMMEDIATELY.

This guy was a HMRC tax officer, and worked at E&Y and is a well regarded tax 'expert' in this field.

I think he is just plain wrong and is trying to create stress and work where there is none.

[CaptainSlow]

johnfm said:

Thanks Captain

I had this tax/payroll advisor suggesting that because they are BIKs, there would be a further:

40% PAYE on the £5.76 NI payment (because the employer is paying it)

so a FURTHER 3.84

This is true...but it is £2.31 and is part of the £230.51 you calculated earlier. You're both saying the same thing.

[johnfm]

Ah yes, but he is then suggesting at the end of the year, that when we gross up for tax, we apply another round of NI to the tax!!

Either way, I think he is over complicating the grossing up procedure. As you have said, for a 40% 1% , divide net by 0.59 AND THAT IS IT

for a 20% PAYE and 11 % NI divide by 0.69 AND THAT IS IT

I think I will just need to get another tax 'expert' opinion to clarify before we suggest to a clinet that they overpay HMRC by £50k!!