Alicia 107 Bpp

This scenario relates to three requirements.

You should assume that today’s date is 28 March 2023.

Alicia is employed by Tusk Ltd, and is currently paid a gross annual salary of £60,000. She is therefore a higher rate taxpayer. Alicia does not have any other income.

Tusk Ltd has offered Alicia the choice of either being provided with a company car or alternatively receiving a salary increase and also being paid a mileage allowance for using her private car for business journeys.

Regardless of which alternative is chosen, Alicia’s new remuneration package will take effect from 6 April 2023 and will apply throughout the tax year 2023/24

Company car alternative

The car will be petrol-powered with a list price of £22,400. It will have an official CO2 emissions rate of 51 grams per kilometre.

Tusk Ltd will not provide Alicia with any fuel for private journeys.

Under this alternative, Alicia will not run a private car.

Salary and mileage allowance alternative

Alicia will receive an annual gross salary increase of £10,000.

Tusk Ltd will also pay Alicia a mileage allowance of 45p per mile when she uses her private car for business journeys. Alicia will drive 8,000 miles in the performance of her duties for Tusk Ltd during the tax year 2023/24.

Alicia’s annual car running costs will be £6,200 higher if she uses her own car for both business and private journeys compared to using a company car.

Required

(a) Advise Alicia of the income tax and national insurance contribution implications for the tax year 2023/24 if she is provided with a company car.

Note. Your answer should be supported by appropriate calculations. As Alicia is a higher rate tax payer you can use a working at the margin approach. However, a full computation approach is equally acceptable. You are not expected to consider any implications for Tusk Ltd.

(b) Advise Alicia of the income tax and national insurance contribution implications for the tax year 2023/24 if she receives a gross salary increase of £10,000 and is also paid a mileage allowance.

Note. Your answer should be supported by appropriate calculations. As Alicia is a higher rate tax payer you can use a working at the margin approach. However, a full computation approach is equally acceptable. You are not expected to consider any implications for Tusk Ltd.

(c) Advise Alicia as to which of the two alternative remuneration packages is the most beneficial to her, clearly showing the details from the scenario in your workings.

ANSWER:

a) Alicia will be taxed on a car benefit of £3,360 (£22,400 × 15%).

Alicias marginal rate of income tax is 40%, so her additional income tax liability in respect of

the car benefit for 2023/24 will be £1,344 (£3,360 at 40%).

There are no national insurance contribution (NIC) implications in respect of the car benefit for Alicia.

Tutorial note. The relevant percentage for the car benefit is 15% because the car has CO? emissions of 51 grams per kilometre.

There is no fuel benefit because fuel is not provided for private journeys.

(b) Alicia’s additional income tax liability for 2023/24 will be £4,000 (10,000 at 40%). Her additional employee class 1 NIC will be £200 (10,000 at 2%). HM Revenue and Customs (HMRC) rate of approved mileage allowance for the first 10,000 business miles is 45p per mile, so the mileage allowance will be tax free with no expense claim possible.

(c) If Alicia is provided with a company car, then she will have an additional tax liability of £1,344

Under the additional salary alternative:

Additional salary. 10,000

Mileage allowance 10,000 of 45p). 3,600

Income tax. (400)

Employes NIC. (200)

Additional running costs. (6200)

. 3,200

The additional salary alternative is therefore the most beneficial to Alicia because she is £4,544 (1,344-3,200) better off,

MY DOUBT:
The part a and b of my answer is correct but I don’t understand how the second option ( additional salary option) is the beneficial one. In the first option the additional tax liability is just 1344 but in second option income tax 4000 and NIC 200 total 4200. Then how is that beneficial if it’s increasing our tax liability? I don’t understand the calculation they did on the (c) answer part either.

Could you please clarify my doubt ?