Business

When is a benefit of little benefit?

Paddy Harty
Paddy Harty Paddy Harty

QUESTION: I am an employee on a salary of £50,000. I have just qualified for a company car which I have been informed carries a benefit in kind charge of £7,500. How will this affect my tax position? I am married with three small children. My wife earns £15,000 in a part time job.

ANSWER. The provision of the company car will be taxed on you as a ‘benefit in kind’ (BIK) as you are aware. This BIK is taxed via a system known as the P11d system whereby your employer will complete a form P11d annually which details your BIKs, and which is sent to HMRC before July 6 following the end of each tax year.

In addition, they will complete form P46(CAR) at the time when the car is first made available to you. This means that your PAYE code should be adjusted to reflect the tax cost of the BIK from the start such that you do not end up having to pay underpaid tax in a lump sum. As the threshold for higher rate (40%) tax starts after total income of £50k, you will be liable for £3k of tax on the value of the benefit.

The BIK will also affect your entitlement to child benefit. With three small children you will currently be receiving £24 per week for your eldest child and £15.90 for the other two children, or £2,900 per annum. Child benefit is not means tested however once either parent’s adjusted net income exceeds £50k they are affected by the ‘High income benefit charge’ or HIBC. The HIBC claws back 1% of the amount of child benefit received for every £100 earned over £50k. Adjusted net income is not just salary but also includes benefits in kind received so in your case your adjusted net income is £57,500. Your HIBC would amount to 75% of the child benefit received or £2,175.

In total therefore, the effective tax cost of being provided with the car is £5,175 or £431.25 per month.

What is extremely unfair about the HIBC is that two parents can be earning £49k each and fall outside the charge whereas one working parent earning £51k falls inside the charge.

An additional burden of the HIBC is that taxpayers must register for self-assessment to report the fact that they are liable for the charge and then pay it via the self-assessment system. This has historically put people to extra expense of often having to employ someone to prepare their self-assessment return.

Thankfully, the system is being reformed so that the HIBC will in future be collected through PAYE therefore removing the need to register for self-assessment.

Unfortunately, in the past parents with simple tax affairs not within the self-assessment system were usually unaware that they fell within the HIBC, and many receive bills including interest and penalties years later. It is believed that over 600,000 families in the UK have opted out of receiving child benefit.

:: Paddy Harty (p.harty@fpmaab.com) is private client tax partner at FPM Accountants (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies