Company Car early termination charge - pre or post tax
Discussion
Not sure whether this question fits best here, or in Finance. Let's try here first :-)
I have a company car which is causing back pain due to offset seating angle. It's a 2 year lease, I'm 18 months in and have an option to terminate early at a cost of £900. The lease cost (paid from pre-tax) + BIK tax cost total around £440 a month - to remaining 6 months is £2,640.
I'm happy to pay the £900 ET (I have another, privately owned car anyway) - but should this fee be paid from PRE-TAX salary (on the basis it's a company car charge for which I am already taxed upon with BIK) or from post-tax salary?
TIA
I have a company car which is causing back pain due to offset seating angle. It's a 2 year lease, I'm 18 months in and have an option to terminate early at a cost of £900. The lease cost (paid from pre-tax) + BIK tax cost total around £440 a month - to remaining 6 months is £2,640.
I'm happy to pay the £900 ET (I have another, privately owned car anyway) - but should this fee be paid from PRE-TAX salary (on the basis it's a company car charge for which I am already taxed upon with BIK) or from post-tax salary?
TIA
I'm "just" a PAYE.
I get a car allowance (£550 a month). Out of that they dedict the monthly lease cost (£250). I then get the other £300 as cash on top of my salary and am tax'd on that £300. I'm also tax'd BIK on the car which is about £200 a month. (all round figures to illustrate the point).
So when I hand the car back, I stop paying the BIK £200 tax - and my lease costs will stop so I will take the full £550 a month as cash on top of my salary - which of course will be taxable income.
None of which answers my question which is whether the early termination fee that has to be paid out of PRE or POST tax?
I get a car allowance (£550 a month). Out of that they dedict the monthly lease cost (£250). I then get the other £300 as cash on top of my salary and am tax'd on that £300. I'm also tax'd BIK on the car which is about £200 a month. (all round figures to illustrate the point).
So when I hand the car back, I stop paying the BIK £200 tax - and my lease costs will stop so I will take the full £550 a month as cash on top of my salary - which of course will be taxable income.
None of which answers my question which is whether the early termination fee that has to be paid out of PRE or POST tax?
I don't know the answer from a HMRC point of view, but my feeling is that the early termination charge should be paid by your employer, in the same way that they have been paying the lease rentals.
If you employer then wants to pass the cost to you, I suspect that this will come out of your post tax income.
If you employer then wants to pass the cost to you, I suspect that this will come out of your post tax income.
anonymous said:
[redacted]
Yeah I know how Early Termination works and already said I'm happy with the £900 charge... the question was whether it would come from PRE or POST tax income. Why do you think it would come from Post-tax salary when it's a company asset for which I already pay Benefit in Kind tax on? 38911 said:
Yeah I know how Early Termination works and already said I'm happy with the £900 charge... the question was whether it would come from PRE or POST tax income. Why do you think it would come from Post-tax salary when it's a company asset for which I already pay Benefit in Kind tax on?
Because you agreed to take the asset for X years at a cost to the company of YYou have broken that agreement and they will have to bear a cost, at this point its a conversation between you and the company nothing to do with HMRC?
anonymous said:
[redacted]
With respect, I don't think you understand the question.1. I've not "broken" any agreement. The agreement has specific provisions to enable early termination, and I am exercising that option. No agreement has been broken.
2. It's not a conversation between me and the company. It's a matter between me and the lease company. The lease company have given me a termination cost and I have accepted it. I need to decide whether to pay it from PRE or POST tax. Once I have decided, I will instruct Payroll accordingly.
3. There is no cost to the company. I am paid a car allowance which I can either choose to take as cash each month (in which case I pay income tax), or put it towards a lease (in which case the money is not tax'd but I pay BIK based on the vehicle P11D).
Edited by 38911 on Tuesday 21st April 10:57
Surely the lease company require £900 and have no interest in whether their £900 comes before or after you are taxed on it.
This being the case I’d just let your payroll people deal with it in what their rules allow.
I’m not sure that you actually get to choose which is more beneficial to yourself.
This being the case I’d just let your payroll people deal with it in what their rules allow.
I’m not sure that you actually get to choose which is more beneficial to yourself.
tex200 said:
Surely the lease company require £900 and have no interest in whether their £900 comes before or after you are taxed on it.
This being the case I’d just let your payroll people deal with it in what their rules allow.
I’m not sure that you actually get to choose which is more beneficial to yourself.
This being the case I’d just let your payroll people deal with it in what their rules allow.
I’m not sure that you actually get to choose which is more beneficial to yourself.
tex200 said:
Surely the lease company require £900 and have no interest in whether their £900 comes before or after you are taxed on it.
Correct. tex200 said:
I’m not sure that you actually get to choose which is more beneficial to yourself.
I'm not suggesting that I get to choose - I'm asking which it should be, i.e. what the HRMC rules are. 
Just in case it helps anyone in future in a similar situation (and to correct the incorrect information given by others), I've just had an email back from my accountant who has confirmed that the Early Termination fee does indeed come out of PRE TAX salary - which is good news and as I expected.
I've just instructed my Payroll accordingly. Job done, happy days.
Someone who knows what they are talking about said:
This charge should be deducted from Gross income and not be subject to Income tax. For the avoidance of doubt HMRC would treat the 'Early Termination' fee in the same way as any other lease payment
(in case anyone was wondering why I didn't ask my Accountant in the first place - I did, but initially got an out of office reply)I've just instructed my Payroll accordingly. Job done, happy days.
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