What is Benefit in Kind?

Although the idea of Benefit in Kind tax for company cars might sound confusing, fear not, as experts in this area Tusker has prepared a handy guide for anyone asking themselves “what is BiK?” or wondering “how is Bik calculated?”

We cover the questions that we are asked the most below, which will take the mystery out of this tax, so that you can focus instead on choosing your new car.

According to our website searches, the most frequently asked questions are:

• What is Benefit in Kind?
• What is P11D?
• How does BIK work?
• What is the BIK rate for company cars?
• How do I calculate my BIK rate?

What is Benefit in Kind?

Benefits in kind are any benefits which you receive from your company in addition to your salary. These are sometimes called ‘perks’ and can include anything from private medical insurance that’s paid for by your employer, to free meals, childcare vouchers and company cars.

Not all benefits in kind are taxed. For example, subsidised public bus services or bicycles and cycling safety equipment provided to an employee to and from their workplace do not trigger BiK tax. Equally, if you have to relocate for work, your employer can cover reasonable removal expenses as a tax-free benefit if needed.

As an employee, you need to pay tax on your company car if you or your family use the car privately in any capacity – which includes commuting. This tax is deducted by your employer through Pay As You Earn (PAYE).

Before we go any further and explain how BiK works, its worth pausing to explain a term that you are about to become familiar with – P11D.

What is P11D?

Put simply, a P11D form is a HMRC document used by an employer to report certain expenses and benefits paid for or made available to employees. It is a form that needs to be submitted annually.

It gives HMRC details of any benefits in kind which are not included in the payroll and subject to PAYE and NIC deduction during the course of a year.

With this in mind, when we talk about P11D values below, you just need to remember that it means the value of the benefit which you have to pay tax on.

How does Benefit in Kind (BIK) work? 

If the benefit or ‘perk’ that you receive through work is taxable, then this payment is calculated by multiplying your tax band against the value of the benefit, which is known as the cash equivalent. This is usually the amount your employer pays to provide you with the benefit.

To understand how Benefit in Kind tax is worked, let’s start with a straightforward example:

• Polly takes up the private medical insurance offered by her employer
• It costs the business £1,000 per year to provide this benefit
• Polly 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 (divided by 12 means Polly pays just £16.66 per month in tax for medical insurance).

When Polly 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.

All making sense so far? When it comes to company cars, the idea is the same, but process is slightly different, but Benefit in Kind is still payable. Let’s walk through it.

 Benefit in Kind for Cars

Unless you use your company car solely for business purposes, which does not include commuting, it is classed as a BIK and therefore you need to pay tax on it. How much tax you pay is dependent on the 1) the P11D value of the car, 2) the BIK percentage rate of the car and 3) your personal income tax rate.

1. P11D Value – this is the list price of the car including any options and VAT.
2. BIK Rate – this is determined by CO2 emissions. In simple terms, the greener your car, the lower the amount of tax you will pay.
3. Personal Income Tax Rate – basic rate is 20% if you earn up to £50,270pa, 40% for salaries of £50,270-£125,139, and if you earn over £125,139pa, the rate rises to 45%.

For the 2023/24 tax year, the Government introduced some changes to BIK, especially for electric and hybrid vehicles to encourage take-up of environmentally friendly cars.

Now, with the new tax year approaching in April, rates on electric vehicles will be set at 2% until 2025, this rises to 3% in 25/6, 4% in 26/27 and will rise to 5% in 27/28. What does this increase mean in real terms? Drivers will still keep almost all of their tax and NI on the amount sacrificed. If you are a basic rate taxpayer (paying 20% tax and 10% NI) you’re looking at savings of 28%, rising to 50% if you are a higher rate taxpayer.

How do I calculate my BIK rate?

For low emission cars (those with less than 75g/Km CO2), there are three main steps to calculating your BIK:

1. Take the P11D value of your car
2. Multiply the P11D value by the percentage band that your car will belong to, as shown here. Basically, the higher the CO2 emissions generated by your car the higher the tax, the lower the emissions so your tax reduces.
3. Finally, multiply this number by your income tax band – either 20%, 40% or 45%

Divide this by 12 to get your monthly BIK amount payable on your car. If you’re paid on a 4-weekly basis, divide by 13 to reflect the number of pay periods.

For cars with more than 75g/Km CO2, the taxable benefit is calculated based on the higher value of either the gross salary sacrifice amount or the Benefit in Kind value explained above.

Calculate your BIK percentage band by using this table or use this car tax calculator tool.

Car salary sacrifice remains a great company benefit that can put extra cash back in your pocket while giving you a brand new car. We’ll always have the most up-to-date information for you here, based on the latest Government guidance.

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