Last updated: 03/09/2021 | Estimated Reading Time: 5 minutes
Benefit in kind - company car tax explained
Many jobs offer a variety of perks outside of their salary package in order to entice potential employees.
One of these is the use of a company car. Company cars aren’t completely free, however. Depending on the type of car, and how you use it, you will likely have to make some payments on any company car as a benefit in kind tax.
In this guide, we’ll explain how benefit in kind tax works, and how much you could expect to pay.
In This Guide:
- What is benefit in kind tax?
- How do I calculate my BIK company car tax?
- BIK company car tax bands:
- Is BIK tax different on vans?
- Which cars are best for company car tax?
What is benefit in kind tax?
Benefit in kind is refers to perks or bonuses given to an employee that are not part of their actual salary. Many of these benefits can be claimed tax-free because they are direct benefits in the workplace. This includes perks such as cycle to work schemes, free or subsidised meals and in-house gym or sports memberships.
Perks that are beneficial to the employee outside of work too, such as the use of a company car, are subject to tax, and are known as a taxable benefit. The benefit in kind tax rate, also known as the BIK rate, is determined by a variety of factors, such as the driver's tax bracket, the car's CO2 emissions and fuel consumption and the vehicle P11d value. P11d value is a car valuation that includes VAT and delivery charges but excludes the first registration fee and road tax.
How do I calculate my BIK company car tax?
There are a few online resources to work out your company car tax rate. The most up to date source is the company car tax calculator available on the government website.
This calculator is useful as the BIK value and therefore the company car tax rate is liable to change with each new tax year, so other online sources may be outdated if they're from a previous financial year.
The calculator takes into account a car's CO2 emissions, and these are measured in one of two ways. If the car was first registered before 6 April 2020 the emissions are measured by the older NEDC test, whereas cars first registered after 6 April 2020 are subject to the newer WLTP test procedure. In practice this means that although the BIK tax rate of most car models has gone down, the actual cash equivalent payments will likely have stayed the same or gone up, due to the new testing procedure being slightly harsher and more rigorous.
BIK company car tax bands:
The BIK company car tax bracket data for each upcoming financial year is as follows:
Cars registered after 6 April 2020
|CO2 emissions (g/km)||Electric range||2020-21 (% rate)||2021-22 (% rate)||2022-23 (% rate)|
|170 or more||37||37||37|
Cars registered before 6 April 2020
|CO2 emissions (g/km)||Electric range||2020-21 (% rate)||2021-22(% rate)||2022-23(% rate)|
|160 or more||37||37||37|
|170 or more||37||37||37|
To calculate your BIK tax rate from these guidelines, you must take the BIK tax band and combine it with your own personal tax bracket. For example, if a car has a p11d value of £20,000 and BIK tax band of 20%, plus your own personal tax bracket requires you to pay 25% tax, the calculation will be as follows:
(Car value) £20,000 x (BIK tax band) 20% = £4,000
£4,000 x (Personal tax bracket) 25% = £1,000
Therefore the amount of tax payable on this company car each financial year would be £1,000
If you own a diesel car you'll also need to pay a 4% additional surcharge, raising the BIK tax payment to £1,040. This is to attempt to dissuade the use of a diesel vehicle as a company car due to concerns about particulate emissions.
Is BIK tax different on vans?
If you're driving a van, you may also be required to pay BIK tax. Just like with a company car, if you're only using the vehicle for business use, you're exempt. This is also the case if you're self employed or are a sole trader. However if you use the van for personal use, you must pay BIK tax at the same rate.
Which cars are best for company car tax?
Many people consider a company car almost non-negotiable for their work, and if you're in this category you're more than likely keen to find the best option for paying a minimal BIK percentage. If this is the case, your best bet is to look into getting an electric car or potentially a hybrid car (depending on its electric range). These types of vehicle incur the lowest possible tax charge as their CO2 emissions are zero for full EVs, and low in the case of hybrid vehicles. Therefore if you want to have a valuable new car but are put off by the high company car tax band, which when coupled with the car's p11d value equates to a hefty BIK car tax payout each year, you could do a lot worse than considering a premium hybrid or fully electric vehicle.