BiK Tax – Company Car Tax Explained
The inclusion of a company car in a remuneration package is often a great incentive to employees who, at a glance, might believe that they’re receiving a free car – unfortunately, that isn’t quite the case.
While being lucky enough to receive a car from their employers, those who do will also be subject to a tax known as benefit-in-kind tax (or BiK). However, this tax is not always explained in detail and can leave employees with various unanswered questions.
How is BiK tax calculated? Is it paid monthly? And what is the BiK tax rate?
This in-depth guide will explain all there is to know.
What does ‘benefit-in-kind’ mean?
Taxable benefits-in-kind are perks received by an employee which are excluded from their monthly salary. These are sometimes referred to as ‘fringe benefits’ and are exclusively available to employees of the company.
As these benefits perks are not stated in an employee’s salary, they are subject to BiK tax.
What is BiK tax?
Benefit-in-kind is a type of tax which is levied on members of staff who receive additional perks as part of their role. It most commonly applies to company vehicles, which is why BiK tax is often referred to as ‘company car tax’.
Some other perks provided to employees that are subject to BiK tax include childcare vouchers and private healthcare, but for the purpose of this guide, we’ll be focusing on the company car aspect of benefit-in-kind tax.
How does company car tax work?
As is the case with any other type of tax, the amount of BiK tax you’ll be subject to pay will be determined by HMRC.
HMRC take various factors into account when calculating BiK tax, including:
- The environmental impact of the vehicle
- The type of fuel it uses
- The vehicle’s value (including VAT)
- Any necessary delivery charges
When researching the impact of BiK tax on your monthly take-home pay, you may come across the term ‘P11D value’ – this is a term attributed to a vehicle’s value, including any add-ons such as a sat-nav or luxury alloys, etc. – combined with any necessary delivery charges.
A P11D value does not include any registration fees, insurance or road tax.
Company car tax rates
BiK car tax rates vary depending on the vehicle’s environmental impact. Starting at 16% for petrol vehicles and 20% for diesel, this BiK tax rate determines how much of the vehicle’s P11D value will be taxable.
This amount is then calculated by your personal tax rate (20%, 40% or 50%) which is determined by the amount of money you earn. The final sum is the amount which will be deducted from your salary to pay for the vehicle.
If your company car was fueled by petrol, had a P11D value of £30,000 and gave off between 105-109 g/km of CO2, it would be subject to a BiK rate of 25% (see table below).
Multiplying the vehicle’s P11D value (£30,000) by its BiK rate (25%) gives you your total BiK amount (£7,500).
This figure can then be multiplied by your personal tax rate, giving you an exact figure which you can expect to be deducted from your salary in BiK tax to pay for the vehicle.
So, say your BiK amount is £7,500 and your personal tax rate is 20%, the amount deducted from your salary would be £1,500 over 12 months (£7,500 x 20%), meaning that £125 would be taken from your pay every month for 1 year to cover the tax.
It should be noted that due to recent car tax changes, after April 6th 2020, company car tax on electric cars will be cut from 16% to 0% for 12 months. This will increase steadily to 1% and then eventually 2% each tax year until 2022/23.
Company car tax bands
Petrol BiK Rates
Diesel BiK Rates
|0 - 50||16%||20%|
Company car tax – Diesel vs petrol
The emissions given off by diesel vehicles are more harmful to the environment than those given off by petrol, which is why they are charged at a higher rate of 4%.
Given that diesel vehicles are generally more efficient than their petrol counterparts, the costs can eventually even out. If you are given the choice between the two, it might be worth working out which option would work better for you financially, considering how far and how regularly you drive.
How to reduce BiK Tax
If you find that your BiK tax rate is too high, your first port-of-call should be to consider changing your vehicle to something more environmentally friendly.
You might even wish to discuss the possibility of going fully electric with your employer, which would significantly reduce the amount of BiK tax owed.
Car allowance tax – Am I better off with a company car or car allowance?
More and more companies are offering their employees the choice between having a company car or car allowance, the latter of which allows the employee greater freedom in choosing their own motor.
This might seem like a great way to receive a cash bonus on top of your annual salary; however, this isn’t always the case. Car allowance is typically added to your annual salary, meaning it will be taxed along with the rest of your income and is likely to push you into a higher tax bracket.
It is also worth remembering that, unlike with a company car, you will be required to deal with the administrative side of owning a vehicle (eg. insurance and breakdown cover), while you are also expected to foot the bill for any repairs, new tyres, etc. These are costs which are usually catered for when you opt for a company car.
Company car fuel benefit
Company car tax rules state that any free fuel provided by the employer is also taxable.
If you are provided with free fuel, you can calculate how much fuel benefit you’ll be required to pay by multiplying your BiK tax rate percentage by the annual fuel charge multiplier – this multiplier changes each year and is controlled by HMRC.
For the 2019/20 tax year, the company car fuel charge multiplier was set at £24,100.
Our earlier illustration identified a 25% BiK tax rate (click here to see our example).
Continuing on from this, the company car fuel benefit would be calculated by multiplying the fuel charge multiplier (£24,100) by the vehicle’s BiK tax rate (25%), giving a total of £6,025.
This figure is then multiplied by your personal tax rate to identify how much tax you will be charged on any free fuel you receive. If this final sum is more than what you would pay for fuel yourself then you are better off requesting that you fill up your own vehicle, rather than receive ‘free’ fuel.
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