Personal allowance taper catches growing numbers of high earning taxpayers
A growing band of high earners are paying 60% tax on a portion of their income, thanks to a policy brought in by the last Labour government and confirmed by subsequent regimes.
Those earning between £100,000 and £120,000 per annum are now effectively paying 60% tax on that portion of their income between the two limits. Above the upper limit, the tax rate reverts to 40%, only to rise again to 45% for those with incomes over £150,000.
This is due to a policy first introduced at the end of Gordon Brown’s government whereby anyone earning over £100,000 per annum saw their Personal Allowance reduced by £1 for every additional £2 earned. This had the effect of dragging all those earning between £100,000 and £120,000 into an unprecedented 60% tax band.
With the recent increases in the Personal Allowance, increased earnings and stagnant tax thresholds, it seems that more than three quarters of a million people have now been caught in this “tax trap” which results in most of their additional earnings going to the tax-man.
The Institute of Fiscal Studies now expects there to be 5.3 million higher and additional-rate taxpayers in the current tax year, up from 3.3 million in 2010-11. The total tax paid by those earning above £100,000 was around £63.9bn last year, up from £47.3bn in 2010-11, according to HMRC.
Mitigate against 60% rate
Projections suggest that more than 790,000 people were caught in the 60% tax trap last year, with more than one million expected to be in the same position in two years’ time.
Many high earners have looked at measures to mitigate against falling into the tax trap, including increasing their pensions contributions or making charitable donations,
But another option could be to take advantage of a corporate salary sacrifice car scheme, and through it select a low CO2 emitting car (or cars) with sufficiently high monthly payments to ensure their salary does not break through the £100,000 barrier. This could include a car for a spouse and / or child.
How might a salary sacrifice car scheme help?
Salary sacrifice car schemes have been one of the success stories of recent times, and increasing numbers of organisations, companies and businesses throughout the country now offer employees the benefit of leasing brand new cars in return for surrendering a set amount from their salary every month.
The proliferation of such schemes – in which employees can enjoy the benefits of salary sacrifice for a new car in much the same way they can for childcare vouchers, private healthcare, cycle-to-work, pensions and other employee benefits – has seen them grow widely in both public and private sectors.
Not only can they be used as a means of tax planning and mitigating against a certain salary level being reached, but they also produce savings in income tax and National Insurance Contributions on the amount of salary surrendered each month.
Such has been the widespread success of these tax-efficient schemes that they have attracted the attention of HMRC, which is keeping a watching brief to ensure they are not diverting excessive amounts of revenue away from the Exchequer.
However, scheme users also pay Benefit-in-Kind taxation on the value of the car benefit – in exactly the same they do with any other company car – so HMRC does receive some additional tax benefit from their increasing take-up.
What are the other benefits of salary sacrifice car schemes?
There is now a wide range of low-emitting new cars which can be funded through a salary sacrifice scheme. Why low-emitting? Because, while income tax and national Insurance are linked to the capital value of the monthly rentals, Benefit-in-Kind taxation is linked to a vehicle’s carbon emissions – and the lower the CO2, the lower the BiK bill. So the choice of car is all important to ensure the savings are made.
Amongst other benefits of salary sacrifice car schemes is the all-embracing nature of the package provided, as this typically includes all servicing, maintenance and repair, fully comprehensive insurance, a no-quibble tyre policy, all automotive glass, annual road fund licence and breakdown and recovery assistance.
This adds up to a very comprehensive and cost-effective car benefits package for employees that other funding methods, such as Private Contract Purchase, find hard, if not impossible, to match.
Duty of care concerns overcome
Another benefit of a salary sacrifice car scheme is that it helps to mitigate the risk associated with employees who are given a cash allowance in lieu of a company car.
By using their cash allowance to fund an appropriate low CO2 emitting salary sacrifice car or cars, the employee could engineer that, even with the extra cash received, their gross pay can be kept below the £100k barrier and out of the 60% tax trap.
However, studies show that cash allowance drivers often opt to choose older vehicles as they see their acquisition as being made with their own money and therefore do not opt for brand new cars. Such so-called ‘grey fleet’ vehicles are often not serviced and maintained as regularly as company-provided vehicles.
As a result, they may pose a potential threat from a duty of care perspective, as the company can be held liable if any serious accidents should occur and such vehicles are being used on company business.
Conversely, a salary sacrifice car scheme provides cash allowance drivers with the opportunity to select a new, modern car incorporating the latest safety technology with low emissions, high fuel efficiency and regular servicing. As a result, this helps to not only improve driver safety but allows employers to meet their duty of care responsibilities.
If you need more information or support with a car salary sacrifice scheme, please get in touch.
Maxxia has developed an innovative scheme – Lifestyle Lease – which brings additional advantages over and above traditional salary sacrifice car schemes. Find our more here.