May 17, 2024

Your Guide to Calculating Benefit in Kind (BIK) for Company Cars

All company cars and vans are subject to Benefit in Kind tax. But how do you calculate company car tax? Read our guide.
Your Guide to Calculating Benefit in Kind (BIK) for Company Cars Header Image

Company cars are the kind of perk that helps businesses attract top talent and retain employees. But company cars aren’t the workplace freebie people sometimes think they are.

Both businesses and the employee will need to pay tax on a company car. Tax payable by employers is known as ‘company car tax,’ while tax payable by employees is referred to as ‘Benefit in Kind’ (BIK) tax. This includes any benefit given to the employee in addition to their salary that they enjoy a personal benefit from, such as a company car that is used for private and business purposes.

But how do you calculate tax on company cars, and what affects the amount you pay? This blog will explain how BIK tax works for company cars, and how to make the right calculations.

What is a Company Car?

A company car is a taxable benefit given to employees by their employer in addition to an annual salary. From financial savings to talent retention, there are many advantages for employers that operate company car schemes, and clearly defined criteria around who qualifies for one.

A company car should be free for employees to use both as a work vehicle and for personal use. Even if the only personal use is commuting to an office, this is still considered a taxable perk by HM Revenue and Customs (HMRC). Not only that, but you’ll also need business car and van insurance if you use a company car for work and pleasure purposes.

How Does Benefit in Kind Work for Company Cars?

Many factors determine BIK tax rates for company cars for both employers and employees. Employees essentially pay tax on the value of the vehicle to them, but that in itself depends on several things such as what its purchase price would be, the type of fuel, and tailpipe emissions.

A company car’s value, and therefore tax rate, can be reduced if a financial contribution is made towards the cost, it is only driven part-time rather than full-time, and it produces low CO2 emissions. It’s also important to remember that if an employer pays for the fuel you use for personal journeys, you’ll be taxed for this separately.

The following criteria are used to calculate the BIK rate for company cars:

  • The employee’s tax bracket
  • The car’s CO2 emissions
  • Fuel consumption
  • The car’s P11D value (recommended retail price)

How Do You Calculate Company Car Tax?

Your Guide to Calculating Benefit in Kind (BIK) for Company Cars

Any company car available for private use is considered taxable income by HMRC. In other words, when the vehicle is provided by the employer, the driver is legally required to pay BIK tax.

Every vehicle falls into a specific BIK percentage band based on CO2 emissions. This was introduced by the UK Government in order to encourage the use of electric, hybrid, or low-polluting cars in line with its pledge to ban new petrol and diesel cars from 2035.

There are 18 different emission bands in total, the lowest starting with vehicles that emit 0-50g/km and the highest from 170g/km and upwards. What you pay as an employee will appear as a percentage, with diesel percentages higher than petrol due to an additional 4% surcharge.

The following formula can be used to calculate company car BIK tax:

(P11D value x BIK percentage banding) x your income tax band = your annual BIK tax

Here, if an employee pays 20% income tax, they will only pay 20% of the vehicle’s P11D value. The example below shows how BIK tax is worked out:

P11D vehicle value (recommended retail price): £20,000Fuel type: Petrol  
CO2 emissions: 95g/km (equal to 20%)Personal income tax band: 20%  

The BIK amount is:

£20,000 (P11D value) x 20% (CO2 percentage) = £4,000.

Now you have the BIK amount you can work out your annual company car tax rate:

£4,000 (BIK amount) x 20% (personal income tax band) = £800 tax for the financial year.

How do You Calculate the P11D Value of a Company Car?

Before you can work out your BIK tax rate, you’ll need the P11D value of the company car. This is important for calculating company car tax and includes the list price of the vehicle including VAT and delivery charges. It doesn’t include first-year Vehicle Excise Duty, also referred to as road tax, or first registration.

P11D value is different from a vehicle’s actual road price, as you can see in the example below:

  • Road price: £15,999
  • List price: £14,700 including VAT
  • Delivery: £650
  • Annual VED (Vehicle Excise Duty): £145
  • First registration: £55

P11D value = £15,350 (list price + delivery price)

If you’re an employer or employee who wants to work out how much company car tax to pay, you can also use the HRMC company car and car fuel benefit calculator.

How do You Calculate Company Car Tax for Electric Vehicles?

Your Guide to Calculating Benefit in Kind (BIK) for Company Cars

Employers and employees can make significant tax savings by choosing a low or zero-emissions plug-in vehicle instead of an equivalent petrol or diesel company car. Current BIK rates are making full battery electric vehicles (BEVs) or efficient plug-in hybrids increasingly attractive as the company car tax is much lower compared to vehicles that rely on combustion engines.

Given that around half of all new cars are secured by businesses and companies, the government is attempting to leverage this to encourage the take-up of low and zero-emission vehicles. Incentives include:

  • BEV drivers pay just 2% BIK
  • Company car tax on electric vehicles is frozen until 2025 and could be extended

Due to government incentives and lower BIK rates, the uptake of electric company vehicles will almost certainly increase over the coming years. Similarly, anyone provided with a zero-emission van for work and personal use will not pay a van benefit charge, whereas all other vans currently incur a £3,960 annual charge which is applicable until at least 2025.

You use the same calculation to work out company car tax on electric vehicles as you would with petrol or diesel models. However, as the example below shows, the savings can be significant.

Have You Worked Out How to Calculate Company Car Tax? Need Business Car Insurance to Cover Your Fleet?

If you use your company car or van for work and pleasure, you’ll need business car insurance to protect your vehicle. Contact Keith Michaels today for a quote.