A guide to benefit in kind tax

Benefit in kind (BIK) refers to a tax on various perks that companies provide to their employees, such as company cars or medical insurance. The term “company car tax” specifically refers to a tax on the benefits of using a company car for business and personal use.

A key advantage of an electric company car is that employees can benefit from considerable savings on their company car tax. Company car tax on an electric vehicle is much lower than for petrol or diesel cars.

This guide will explain what benefit in kind (BIK) tax is and how to calculate company car tax. In addition, this guide will explain how drivers with a company car can reduce their company car tax when they have an electric vehicle.

How is company car tax calculated?

The amount of company car tax an employee pays is based on three main factors:

• BIK tax band – BIK tax bands determine the percentage of a vehicle’s value that can be taxed. BIK tax bands can be as low as 2% or as high as 37%. A car’s BIK tax band is based on the carbon dioxide (CO2) emissions produced by a vehicle. Therefore, the lower a vehicle’s C02 emissions, the lower the BIK tax band. In contrast, the most polluting cars, such as petrol or diesel cars, will be placed in the higher BIK tax band.
• The PD11 value of a vehicle –  Is the vehicle’s list price.
• Income tax bracket – The percentage of your gross income you pay in tax.

Company car tax is usually deducted from an employee’s gross monthly income pay.

Why is company car tax lower for electric car drivers?

As discussed above, BIK tax bands are calculated based on a vehicle’s carbon dioxide emissions.

Good news for EV drivers. Pure electric vehicles have zero exhaust emissions. Therefore, the BIK tax band on electric cars is very low (2%). 

BIK tax bands are expected to remain low for EVs. Between 2023-2025, the BIK tax for full-electric cars is expected to stay at 2%. This is significantly lower than the BIK rates for petrol and diesel vehicles – which can be as high as 37%.

How do you calculate company car tax?

The calculation for company car tax is as follows:

(P11D value of a car x BIK tax band percentage) x income tax bracket percentage

An example comparing company car tax on an electric and diesel car:

Let’s look at an example of the average company car tax for a pure electric car:

P11D value of a pure electric company car: 30,000.

BIK tax band of an electric company car: 2%.

Income tax bracket: 30%.

(30,000 x 0.02) x 0.30 = £270 a year of company car tax on an electric car.

Let’s look at an example of the average company car tax for a diesel car:

P11D value of a diesel company car: 30,000.

Average BIK tax band of a diesel car: 31%.

Income tax bracket: 30%.

(30,000 x 0.31) x 0.3 = £2790 a year of company car tax for a diesel car.

Use this HMRC calculator to figure out the amount of tax for your company car.

Is the BIK rate different for pure electric vehicles and hybrids?

Yes, the BIK tax rate is higher for hybrid cars than for pure electric cars. However, the BIK tax band is often lower; therefore, company car tax is often cheaper for hybrid vehicles than petrol or diesel vehicles.

Other tax advantages of electric vehicles

• Electric vehicle drivers are exempt from road/vehicle tax (vehicle excise duty) until 2025.
• Leasing a car through a salary sacrifice scheme will reduce your total taxable gross income. Therefore, you will likely pay less tax on your gross income.
• Exempt from congestion charges such as the London ultra-low emission zone (ULEZ).

How much is benefit-in-kind tax on an electric van?

No, you do not have to pay benefit in kind tax for a pure electric van used either for work or private use.

There are no BIK charges for electric vans

What other incentives are there for businesses to go electric?

In addition to the employees’ company car tax savings, there are many other incentives available for businesses that want to go electric.

Workplace Charging Scheme

A few government grants are available; however, only one is specifically for business. The government currently has an incentive for businesses known as the workplace charging scheme. However, this scheme is set to end in March 2024. To read more about the workplace charging scheme, click here.

Reduced national insurance contribution for employers on EV company cars

Employers must pay national insurance contributions for their employees. Employers will pay less for the national insurance contributions (NIC) for electric company cars.

Reducing your workplace carbon footprint

Electric vehicles will also help businesses reduce their carbon footprint and become more carbon-neutral.

Employee incentives

Free workplace charging is a huge benefit for employees and may encourage employees to attend the office more frequently.

Frequently asked questions

1. What is the P11D value of a vehicle?

The P11D value of a vehicle is the list value of your car.

2. What is the difference between company car tax and benefit-in-kind tax?

Benefit in Kind refers to a broader term that includes a variety of non-cash perks provided by companies, such as corporate cars or medical insurance. The term “company car tax” refers to a tax on the benefits of using a corporate car for personal use.

3. Will the BIK tax band for pure electric cars change?

Not for the time being. BIK tax bands for pure electric cars will remain at 2% until 2025. After 2025, BIK tax will increase by 1% each year until 2028.

Summary

Benefit in kind refers to any taxable benefit you receive from your employee on top of your income. This includes company cars. The tax paid on company cars is specifically known as company car tax. Multiple factors affect the amount of company car tax that company car drivers have to pay – covered in the guide above.

Have you still got some questions about home EV charging? Our helpful team of EV experts are only a click away. Email us at customercare@rightcharge.co.uk.