What is BiK Tax (Benefit-in-Kind Tax)?

This tax is applicable when your employer provides you with something that you can use personally, like a company car, as part of your job.

Imagine your salary is your allowance for doing your job, but if your employer throws in a car you can use for personal stuff too, that's a bonus! But the government says that a bonus is like extra money you earn, so you have to pay a little tax on it.

Here's how it works a bit more simply:

• Company Car as a Bonus: Think of a company car as a free bike from your employer. It's awesome to have for trips or errands, but it's not essential for your job.
• Tax on the Benefit: The taxman (HMRC) says this bike (or car) is a benefit you're getting, so you have to pay a bit extra tax on its value, kind of like paying a little for the bike instead of getting it for free.
• Lower Emissions, Lower Tax: Cars that pollute less (electric cars for example) are seen as a bigger bonus to the environment, so the tax you pay on them is lower. Gas guzzlers that pollute more are seen as a less eco-friendly bonus, so the tax is higher.

It can get trickier with the exact amount of tax you pay, but that depends on how expensive the car is and how much it pollutes. But hopefully, this explains the basic idea of BiK Tax - it's a tax on the extra good stuff you get on top of your salary! 

We go into more detail below if you want to continue reading onward.

How it Works in more Detail:

1. Value of the Benefit: The amount of BiK tax you pay depends on the value of the benefit you receive. For company cars, this is based on the car's list price (including options) and its CO2 emissions.

2. BiK Tax Rate: There are different BiK tax rates depending on the CO2 emissions of the car and its list price. Electric cars usually have lower BiK tax rates compared to petrol or diesel cars because they produce fewer emissions.

3. Personal Usage: The BiK tax is calculated based on the car's value and your personal usage of the car. If you use the car for personal journeys, the BiK tax applies.

4. Taxable Value: The taxable value is a percentage of the car's list price, determined by its CO2 emissions and fuel type. This percentage is then multiplied by your income tax rate to calculate the BiK tax you owe.

5. Employer's Reporting: Your employer reports the taxable value of the benefit on your P11D form, and the BiK tax is deducted from your pay through PAYE (Pay As You Earn).

Example:

Let's say you have a company car with a list price of £30,000 and it's an electric car with zero CO2 emissions. The BiK tax rate for electric cars might be, for example, 1% of the list price.

• Taxable Value: £30,000 (List Price) x 1% = £300
• Your Income Tax Rate: Let's say it's 20%
• BiK Tax Owed: £300 x 20% = £60 per year

Does that make sense? Let's look at a comparable example.

Example 2:

Let's imagine two friends, Ben and Emily, both get company cars from their employers. Here's how BiK tax might play out for them:

Ben:

• Ben gets a brand new, high-performance car with high CO2 emissions (pollutes more).
• This car is seen as a very valuable perk by HMRC (HM Revenue & Customs AKA the taxman).
• Let's say the car's P11D value (like a fancy way of saying pre-tax price) is £30,000 and it falls in the 37% BiK tax band due to high emissions.
• Here's a simplified way to calculate Ben's BiK tax (it can be more complex in reality):

Tax to pay = P11D value x BiK band (%)

Tax to pay = £30,000 x 37%

Tax to pay = £11,100 per year

Emily:

• Emily gets a smaller, fuel-efficient car with very low CO2 emissions (pollutes less).
• This car is seen as a less valuable perk by HMRC due to its eco-friendly nature.
• Let's say Emily's car's P11D value is £15,000 and it falls in the 20% BiK tax band.
• Here's a simplified way to calculate Emily's BiK tax:

Tax to pay = £15,000 x 20%

Tax to pay = £3,000 per year

Even though both Ben and Emily get company cars, the BiK tax Ben pays is much higher because his car is more expensive and pollutes more. So, choosing a car with lower emissions, such as an electric car, can be a good way to save money on BiK tax!

Remember: This is a simplified example just to show you how BiK tax works and the actual calculation can be more complex. It's always best to check with your employer or HMRC via the gov.uk website for the latest BiK tax rates and how they apply to your specific situation.

Summary:

BiK tax is an additional tax you pay on the benefit you receive from your employer, such as a company car. It's based on the car's value, CO2 emissions, and your income tax rate. Electric cars generally have lower BiK tax rates, making them more tax-efficient options, especially for salary sacrifice schemes.

We hope this helps to explain what BiK tax is and why you might have to pay it. But now you're probably wondering, how exactly does this fit in with the salary sacrifice scheme? Let's go through it in this article.