What is Benefit in Kind tax?

31st May 2021

What is Benefit in Kind tax?

If you’re interested in business car leasing, you’ll need to understand the tax implications that come with it. Offering a company car is a fantastic incentive or ‘fringe benefit’ for your employees – it can help to increase retention and will offer your staff a stress-free alternative to car ownership.

However, as one of two things that are certain in life, your employees will have to pay tax. For company cars, this is known as a ‘benefit in kind’.

What is a benefit in kind?

A benefit in kind is a workplace benefit that can be used in your personal time as well as during working hours. Employers can offer incentives such as:

• Private medical insurance

• Childcare vouchers

• Company cars.

These are separate from a monthly salary, and the employee will have to pay a Benefit in Kind (BIK) tax on these incentives.

BIK applies to both business-only and business/personal use. It’s important to remember that cars which are used to drive to work are classed as business and personal use – unless the workplace is only temporary. As the business owner, you can negotiate the best leasing deal based on your employees’ needs.

How do you calculate Benefit in Kind for company cars?

BIK tax will appear on your payslip as a form of income tax. The tax is calculated based on:

• The car’s taxable value, otherwise known as a P11D value. This is based on condition, depreciation, fuel type and emissions.

• Your annual income.

• Any time off the road, for example when it’s in the garage for maintenance.

You can reduce the amount of BIK tax you pay if you’re only using it part-time or you contribute towards the cost of the vehicle. There are also tax incentives for low emission vehicles.

Low emission vehicle tax incentives

As the car’s P11D value is calculated based partly on emissions, environmentally friendly vehicles will benefit from reduced rates. Generally this applies to all electric cars or hybrids with CO2 emissions of 1 to 50g/km, or an electric-only range of at least 130 miles.

The law has recently changed with regard to low emissions benefits. Specifically, in 2020 you’ll pay no BIK for cars with 0 to 50g/km emissions.

If the car was registered after April 2020, the BIK will increase to 1% in 2021/22 and 2% in 2022/23. If it was registered before this date, it will increase to 2% in 2021/22 and for the next two years thereafter.

Calculating your tax

If you’d like to offer company cars, or you’d like to join an employee company car scheme, you can estimate how much BIK tax you’d pay with this HMRC calculator. If your employer has not chosen a car or fleet yet, it may be worth suggesting a low emission vehicle.

For more information on leasing a low emission, hybrid or electric car, read the Car Lease Agent guide here.

Our leasing consultants will be only too happy to help if you have any questions about leasing – get in touch.