- Parkers explains what benefit-in-kind tax is
- How does it affect the tax you pay on a company car?
- Find out which BIK band your car is in
If you’re lucky enough to be offered a company car as part of your remuneration package, you’ll also be unlucky enough to be subject to benefit-in-kind (BIK) tax.
But what is BIK, why do you have to pay it and how is it calculated? Parkers has the answers.
What is BIK?
Benefit-in-kind is a tax levied on employees who receive perks in addition to their salary as part of their remuneration package.
If you have a company car which is made available for private use (i.e you take it home in the evenings and at weekends), the taxman will apply a benefit-in-kind value to the vehicle.
How is BIK calculated?
To work out the BIK value of a company car, you multiply the car’s P11D value (its list price including optional extras, VAT and delivery charges, minus the first year registration fee and annual VED car tax) by the percentage banding the car sits in. From April 2018 a 4% surcharge was applied to diesel cars unless they meet new Real Driving Emissions stage 2 (RDE2) targets.
You can find your car’s BIK banding here.
As an example, a Volkswagen Golf S 1.6 TDI 5-door has a P11D value of £20,370 and emits 106g/km of CO2, putting it in the 23% BIK band. Therefore, the BIK value is £20,370 x 23% = £4,685.
To get the amount your company car will cost you in tax per year, you then multiply the BIK value by your income tax banding.
Therefore, a base rate taxpayer in the Golf will pay £4,685 x 20% = £937 per annum. For a 40% taxpayer, the calculation is £4,685 x 40% = £1,874 per annum.
How does BIK compare with salary sacrifice or cash alternative schemes?
Previously salary sacrifice schemes could be quite beneficial for company car drivers; the cost of the car could be deducted from the salary pre-tax to pay for a vehicle on the scheme, with the employee effectively paying tax only on the BIK charge.
This now applies solely to ultra-low emission vehicles - those rated at 75g/km of CO2 or less - and in other cases, the tax is based on the higher of either the salary sacrifice alternative or the BIK.
So, you will now be taxed on the actual amount of salary sacrificed unless the BIK is higher.
For those offered a cash alternative, the situation is similar - if you receive an additional £6,000 per year in lieu of taking a company car with a BIK of, say, £3,560, you will now be taxed for the full £6,000 - and a corresponding increase in National Insurance, plus a potentially higher tax bracket on that income may apply.
In other words, you're going to be taxed on the benefit you actually receive, be it income or vehicle, but can potentially still save by opting for a vehicle with 75g/km or lower emissions.
Existing salary sacrifice schemes taken before April 2017 will be allowed to continue until 2021.
How much should I expect to pay in company car tax?
You can use the Parkers company car tax calculator to quickly work out how much you'll be liable to pay for a given make and model.
The table below outlines the tax payable on company cars over the next few years, arranged by a car's emissions output: Remember that you need to add a further 4% - up to a maximum of 37% if you’re running a diesel car that does not conform to RDE2 emissions standards (or Euro 6d).
|CO2 (g/km)||Miles||% of P11D||% of P11D||% of P11D||% of P11D|
||More than 130
|1-50||Less than 30
What about BIK on vans?
If you have personal use of a company van then BIK may be applied at a base rate of £3,350 from April 2018 (or £646 for electric vans) dependant on how frequently it is used. You are allowed ‘reasonable’ use of a van before you have to pay BIK so you will be able to take it home at night; but if you use a company van as a weekend runabout or to go on holiday, BIK will need to be applied.
To get your van BIK you multiply £3,350 by your income tax banding (either 20% or 40%). If multiple people share the van, divide that £3,350 figure by the number of employees using it first.
This section of BIK is particularly pertinent to double cab pickups such as the Mitsubishi L200 and Nissan Navara, both of which offer four doors, comfortable cabins and seating for five adults. To qualify as a commercial vehicle, it must have a payload of one tonne. Double cab pickups generally have a minimum of 1,045Kg, to allow the fitment of a factory hardtop without reducing the payload below that threshold.
Does BIK apply to free fuel?
Some companies will pay for an employee’s private fuel (i.e commuting and leisure mileage) as well as paying for business miles. If this is the case, benefit-in-kind tax will apply to the fuel perk, too.
The taxman sets a notional figure of £23,400 for the fuel benefit charge multiplier, which is then multiplied by the BIK percentage banding.
Using the same Volkswagen Golf 1.6 TDI as an example, the fuel benefit charge will be calculated as follows: £23,400 x 23% = £5,382. To work out how much tax the fuel benefit will cost, multiply by your income tax banding:
£5,382 x 20% = £1,076 per annum or £90 a month
£5,382 x 40% = £2,153 or £179 a month
Paying this much tax a month for the benefit of ‘free’ fuel means that you need to calculate how much fuel you’re getting from your company for private mileage to be certain whether it’s a worthwhile perk.
Familiar company car tax terms
- Benefit-in-kind (BIK) - this is any benefit which employees receive from employment but are not included in a salary. The obvious example in our case is company cars, which are taxed according to the income of the employee.
- Emissions - the amount of gas the car emits from the exhaust. Measured in terms of CO2 for company car tax purposes.
- g/km - the level of carbon dioxide emitted by a car is measure in grams per kilometre.
- P11D - this is the form that each employer must fill in annually and send to the tax office.
- P11D value - this is the value of your car including RRP, VAT, delivery and any extras (such as metallic paint or satellite navigation). It does not include road tax or first registration fee.
- Personal tax allowance - this is a sum of money that you're allowed to earn without being taxed upon it - currently £11,850.