What is Benefit in Kind? How it works and how much you can save

If you’re confused about Benefit in Kind (BIK), you’re not alone. With BIK changes due in April, here’s our straightforward guide to BIK. We’ll cover the questions we’re asked the most:

• What is Benefit in Kind?
• 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 benefits which employees receive in addition to their salary. They are sometimes called ‘perks’ and include things like private medical insurance that’s paid for by your employer, free meals and, of course, company cars.

As an employee, you pay tax on a company car if you or your family use the car privately (including commuting) and the tax is deducted by your employer through Pay As You Earn (PAYE).

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 relocate for work.

How does BIK work?

Where the benefit or ‘perk’ is 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, let’s start with a straightforward example:

• Brenda takes up the private medical insurance offered by her employer
• It costs the business £1,000 per year to provide this benefit
• Brenda 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 Brenda is paying just £16.66 per month in tax for the benefit).

When Brenda 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.

So far, so good? When it comes to company cars, the process is slightly different but Benefit in Kind is still payable. Let’s walk through it.

What is the BIK rate for company cars?

Unless you use your company car solely for business purposes (this does not include commuting), it is deemed a BIK and therefore taxable. 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 VAT. This value is used to represent the net price of the vehicle being driven.

2)    BIK Rate – this is determined by CO2 emissions. In simple terms, the greener your car, the lower the tax.

3)    Personal Income Tax Rate – basic rate is 20% if you earn up to £50,000pa, 40% for salaries of £50,001-£150,000 and if you earn over £150,000pa, the rate rises to 45%.

For the 2020/21 tax year, the Government introduced some changes to BIK, the biggest of which was a 0% rate for electric vehicles in a bid to encourage take-up of environmentally friendly cars.

Now, with the new tax year approaching in April, rates on electric vehicles will be rising from zero to 1% BIK. 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 11% NI) you’re looking at savings of 30%, rising to 50% if you are a higher rate taxpayer.

How do I calculate my BIK rate?

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

As an example, a Kia e-Niro that falls into the 1% BIK bracket attracts substantial savings and a monthly BIK tax of just £5.47.

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

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