I'm provided with a company car by my employer and therefore have to pay benefit in kind taxation on the vehicle. As a 40% tax payer, the cost of this is on the rise each year and isn't particularly cheap, given that the car is provided as a 'job need' vehicle, rather than a management perk.
Simple question - if I pay into the company pension scheme via salary sacrifice, can I reduce my earnings to the point where I cease to be a 40% tax payer, thus halving my company car tax bill? Does it work like that?
For the sake of argument, let's say that my salary is £45,000. For the 2016/17 tax year, the threshold for 40% tax is £43,000, so if I pay, say £5,000 into my pension by way of salary sacrifice, that would reduce my salary to £40,000 and therefore put me back into the 20% tax bracket. Would the BIK tax on my company car therefore halve?
For the sake of this discussion, ignore the fact that by becoming a 20% tax payer, I would receive a reduced rate of tax relief on the contributions to the pension...for the time being at least!!
|
You've muddled up some of the details but, in principle, yes. You only pay higher rate income tax on taxable income above the threshold, so if you reduce your taxable income below the theshold, you'd pay only basic rate.
But you would have to go far enough below the threshold for the BIK value of the car not to take you back above it.
|
Just to flesh out the illustration, if your base salary is £45,000 and you have a £30,000 car with a 20% BIK rate, your income for tax purposes is £51,000. Say you normally contribute 6% of the base to your pension, that becomes £48,300. So you'd need to contribute that £8,300 to your pension to get below the £40,000 threshold (if that's what it is.) That makes your pension contribution for the year £11,000, or nearly 25%; not sure whether there's a percentage ceiling on the amount you can contribute pre-tax but it seems a big chunk to be doing without.
To look at it another way, if your employer paid you a car allowance instead, would you increase your pension contributions just to reduce the tax bill on that?
|
|
One more thing: www.gov.uk/tax-on-your-private-pension says that your tax-free contribution limit is £40,000 in a year or 100% of your annual earnings. So if you can afford to forgo that much income, there'll be no tax to make it worse.
|
You could also reduce your taxable income via a SIP if your employer offers one. Assuming that they all work the same way you can get £1800 off your taxable income each year.
Not a massive reduction, but it might help if you are close to the limit and the money is only tied for 5 years rather than retirement (if that's longer)
|
|
Thanks both. I hadn't factored in the BIK value of the car and the effect that this has of bumping up the salary. Looks like rather a large chunk of income to put aside, just to minimise a tax bill. Perhaps the next car will have to be some sort of hybrid/PHEV to keep the tax bills in check!
|
Paying into pension to reduce company car tax? - WillDeBeest
