Benefit-In-Kind tax – a guide

Benefit-In-Kind tax, or company car tax, has been in the news of late after it was confirmed by HM Revenue and Customs (HMRC) that diesel-hybrids are exempt from the normal three per cent surcharge that applies to diesel cars.

That will come as welcome news to company car users as it means they can benefit from the fuel economy savings of a ‘diesel’ model, without being hit by an additional levy applied because of particulates released by diesel drivetrains.

But what is BIK tax and how is it calculated?

MotorTorque has created a guide explaining BIK tax and its intricacies which should help you understand the tax and maybe even save you money on your next company car.

What is BIK tax?

Benefit-In-Kind tax is best described as company car tax. As the name suggests it’s a charge levied against users who are granted a company car.

Essentially, you have to pay for the right of the benefit of a company car in the form of BIK tax, meaning it can often be more expensive than you first thought.

It’s a wonderful situation to be in because you forego the initial outlay of a new car however, depending on your choice; you could end up paying more in the long run if you pick a particularly expensive car or one which pumps out a lot of CO2.

That’s because the amount of company car tax you pay is based on a number of factors including list price, fuel type and CO2 emissions.

It’s designed to make those cars which are more harmful to the environment, more expensive to own and hopefully push you towards cheaper, more environmentally friendly models.

BIK – key factors

The amount you pay in BIK tax is calculated according to the following:

• List price – This is the final price, including VAT and the cost of any options selected. There was a maximum cost of £80,000, however that was removed in April 2011.

• Fuel type – Diesels are traditionally more economical than petrols but they release more harmful particulates, too. That’s why they are hit with a three per cent surcharge when compared to petrol engines.

• Fuel usage – If your company car contract allows you to use your car for personal use, you will be forced to pay tax on the fuel you use for private travel.

• CO2 emissions – Depending on the amount of CO2 emissions your car produces, you’ll have to pay a percentage of the cost of the vehicle in BIK tax. It’s split into bands so for cars emitting 75g/km or less there is a five per cent charge, for example. You can never pay more than 35 per cent of the list price of your car, dependent on CO2 emissions, per year.

Diesel cars carry a three per cent surcharge, so, if your diesel car emits 110g/km in CO2 emissions and carries a ten per cent BIK rate, an extra three per cent is added meaning you will pay 13 per cent in BIK.

A full list is available, here.

• Other factors – BIK is also influenced by any capital contributions you make towards the car and if the car is off the road for a period of time.

Example BIK charges

John Smith opts for a Volkswagen Golf BlueMotion, 1.6-litre TDI. The hatchback emits 99g/km which means it is charged 13 per cent of its list price - £19,430 - in BIK, including the three per cent diesel surcharge.

Earning less than £35,000, John Smith also falls into the 20 per cent, basic rate of income tax.

For the vehicle alone and without income tax, John Smith will pay £2,519 a year for the use of his company car in BIK. He will then have to pay 20 per cent of that cost in income tax, the equivalent of £504.

So, for a year, John Smith will be charged £3,023 in BIK tax to run his company car, before running costs are thrown into the mix.

Follow the link to work out your own company car tax payments.

Company fuel allowance

The number of companies paying for private fuel use has reduced dramatically over recent years because BIK rates have increased to a point where only high mileage company car owners will benefit from the deal.

Using a government set Fuel Benefit Charge Multiplier of £18,800; the amount of tax you pay on fuel is worked out according to the CO2 emission rating of your car.

So, for the Volkswagen Golf outlined above, John Smith would pay 13 per cent of £18,800 per year before income tax is added.

That means £2,444 is payable in BIK tax before £488.8 is added, according to the 20 per cent rate of income tax. That means for 12 months John Smith would pay £2,932 for his company fuel allowance.

According to Deloitte, under current BIK rules, a company car user in the basic income tax band would have to travel 6,570 private miles before the amount spent on BIK tax outweighed the actual cost of fuel used.

That’s why companies are more likely to offer an increase in salary to cover the increased outgoings in fuel.

Who’s eligible?

The outlined BIK tax rates apply to anyone who receives a company car from their employer and earns more than £8,500 a year.

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