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Benefit in kind (BiK), or company car tax as it's more commonly known, is a long standing part of using a company car. Depending on the options available, you could end up paying quite a lot in monthly company car tax, which isn't ideal as other costs continue to rise.
More employers are turning to fully electric cars for their fleet options thanks to incentives and government grants. Whilst it can be confusing to know how much you are required to pay and which cars make you pay more, choosing an electric car can add even more questions if you're unfamiliar with them.
Electric cars do continue to offer benefits to those who use them as a company car thanks to a lower rate set by the Government, but what does choosing an electric car mean for the amount that you personally pay?
A benefit in kind is any non-cash benefit of monetary value that is provided for an employee by the company that they work with. This can be medical insurance, a company car, or child care vouchers and usually require tax to be paid on them, although there are some that are tax free.
BiK tax was first introduced in 2002 and applies to any car bought by a company for their employees to use for private use. The idea behind it was to encourage businesses and company car drivers to choose company cars with lower CO2 g/km.
A company car is classed as a taxable perk that an employee receives from their employer. Both parties pay separate amounts of company car tax based on the vehicle's value, it's CO2 emissions, and the amount that the employee earns. It can be a little confusing, but thankfully you don't need to work this out yourself.
Whilst electric cars previously had a tax relief, that is no longer the case. However there is a reduced electric company car tax rate in comparison to petrol or diesel cars as they have zero emissions.
The government currently have the BiK rate set at 2% of the vehicle value for the 2022/23 tax year for electric cars as they produce 0 g/km of CO2. This is confirmed to continue until the end of the end of the 2024/25 tax year, giving another benefit to electric cars over petrol and diesel models.
For comparison, petrol and diesel cars are taxed at a rate of up to 37% depending on it's CO2 emissions. Cars registered before April 2020 are subject to different rates again as they were registered before Worldwide harmonised Light vehicles Test Procedure (WLTP) was introduced. Similarly a car with a smaller electric range, such as a plug in hybrid, will also have a higher tax rate.
The actual monetary amount that it equates to will then obviously differ from car to car. The Nissan Leaf is going to have a lower monetary value to pay than the BMW i4 but both are taxed at the same rate of 2%. The amount of company car tax that is paid in total is worked out into two amounts: the amount payable by the employer and the amount payable by the employee.
An employers payment takes two factors into considerations: the P11D value of the car and the tax rate for that vehicle. The P11D value is the list price of the car including VAT, any additional option on the car and the delivery fee. An employer must fill out one form for BiK tax for every employee and send to HMRC so that the correct tax can be calculated and paid.
The amount that you pay is worked out differently. What they pay depends on the previous points but then also takes their personal income tax bracket into consideration too. The P11D value is multiplied by the BiK tax bracket and multiplied again by your personal tax bracket.
The following formula is then used to calculate BiK tax: P11D value x BiK x tax bracket = BiK tax.
For example a Jaguar I-Pace S has a cost of £258 for those with a tax rate of 20% and £516 for those taxed at 40%. When comparing to the Jaguar E-Pace S, it costs £2738 for those taxed at 20% and £5477 for those taxed at 40%.
The electric I-Pace sees an employee pay under 10% of the amount that someone driving the petrol E-Pace does. If an electric vehicle is an option for a company car, an employee will clearly benefit financially when choosing electric vehicles over a petrol equivalent.
Company car tax is unavoidable but there are options for making it easier on your payslip. One of the many benefits of electric vehicles is that they offer huge savings through a lower BiK rate whilst also being better for the environment. This is also frozen for the next couple of years, making a fleet investment in electric cars an excellent idea.
For anyone choosing a company car an electric car is a great option, not only does it help to keep more money in your pocket but it lets you test out the electric car lifestyle without fully committing to buying one for yourself.
