“In this world, nothing can be said to be certain, except death and taxes.” So wrote Benjamin Franklin in a letter, way back in 1789. Over two hundred years later and this saying still stands, particularly when it comes to company cars.
Gone are the good old days when this benefit was tax-free. Today, employees must pay benefit-in-kind (BIK) tax on their company car which is something that some struggle to calculate.
That’s why we’re taking this opportunity to answer these common questions:
• What is benefit in kind?
• How does BIK work?
• What is the benefit-in-kind tax rate for company cars?
• How can you calculate benefit-in-kind tax for your company car?
What is benefit in kind?
Benefits in kind are benefits that employees receive in addition to their salary. Some benefit in kind examples include perks like private medical insurance that’s paid for by the employer, free meals and, of course, company cars.
Other items that you might not think of as benefits also come under BIK, like amounts in excess of HMRC’s approved rates for mileage allowance.
Not all benefits in kind will be taxed. For example, subsidised public bus services or bicycles and cycling safety equipment provided to get employees to and from their workplace. Or reasonable removal expenses if an employee has to move for work.
How does benefit in kind work?
Where BIK are taxable, payment is calculated by multiplying your tax band against the value of the benefit, known as the cash equivalent. This is usually the amount your employer pays to provide you with the benefit.
To understand how to calculate benefit in kind, we’ll start with a straightforward benefit in kind example:
• Joy takes up the private medical insurance offered by her employer
• It costs the business £1,000 per year to provide this benefit
• Joy earns £25,000 per year so she is a basic rate taxpayer (20%)
• The BIK is calculated on the basis of her tax band: £1,000 x 20% = £200
When Joy next receives her P11D statement, it will show this benefit and the amount of tax she needs to pay on it. This amount will be deducted from her monthly salary in equal chunks, usually within a month or so of the benefit going live.
This is nice and simple to understand. But when it comes to company cars, the situation becomes slightly more complex.
The benefit in kind tax rate for salary sacrifice cars
To encourage employers and employees to adopt the most environmentally friendly cars, the government has introduced a new way of calculating BIK. If you have access to a company car that you use solely for work and not for personal use, it’s classed as a work tool and not a benefit and won’t be subject to benefit-in-kind tax.
However, if you decide to take up a car benefit, including a car that’s available for personal use, you will be subject to benefit-in-kind tax.
The government’s BIK rules state that if you’re driving an ultra low emission vehicle (ULEV) with CO2 emissions below 75g/km, the annual taxable benefit will be calculated like this:
The car’s P11D value (list price, including extras and VAT, but without the first-year registration fee and vehicle tax) x the BIK rate (which is based on the CO2 emissions and fuel type) x your tax rate (20/40/45%)
If your car emits more than 75g/km in CO2 you will need to use the higher of your income tax saving on the gross salary sacrifice amount or the BIK amount as calculated above.
To calculate your BIK percentage band, you’ll need to know your personal tax band and your car’s:
1. CO2 emissions
2. P11D value:
a. the list price including extras and VAT
b. but not the first year registration fee and vehicle tax
Once you have this information, use this table to work out the BIK amount.
The most helpful salary sacrifice car providers supply you with an online tool to calculate these figures and include it as part of the quote provided to you.
And don’t forget ...
There are two other things to note:
1. These rules won’t come into effect until April 2021 for individuals with salary sacrifice arrangements in place pre-6th April 2017. However, a new driver on a new scheme, and anyone who comes to the end of their hire period before 2021 and takes up a new car, will also be subject to the new BIK rules.
2. Diesel cars (excluding new RDE2 diesels) incur an additional 4% up to a maximum of 37% depending on CO2 emissions - this is captured in HMRC’s taxable benefits table. For RDE2 diesels, there is no added percentage.
The position on BIK doesn’t stand still for long and from April 2020 new company car tax bands will come into force that take into account vehicles with zero-emission mile ranges and very low emissions. This will reward drivers of these vehicles with a significantly lower benefit in kind tax rate and make electric range vehicles, in particular, an extremely attractive option under car benefit and traditional company car schemes.
It pays to keep an eye on what’s happening with company car tax. By being in the know, you can make the right company car choice at the right time to help you remain in control of your tax burden. So, look out for our blog posts which will keep you up to date with everything you need to know in this area and much, much more.
Find out which company car will work best for you by clicking here.