What is benefit-in-kind tax?

What is Benefit-in-Kind Tax?

As well as the £80,000 limit for a company car being removed, changes to Benefit-in-Kind tax rates will affect company car owners and drivers across the UK.

Below we run through some the changes to help you find your Benefit-in-Kind rate.

What is BIK tax?

Benefit-in-Kind tax is often called company car tax in the UK and is paid by on any company car driven on the UK roads.

Benefit-in-Kind tax is designed to tax those who get the use of a company car and, if it is not taken into account when a company car is being chosen, it can get very expensive.

The tax uses different letters to identify different cars and different rates. Electric cars fall under 'E', diesels under 'D' and all other types fall under 'A'.

How is Benefit-in-Kind tax calculated?

Benefit-in-Kind tax is calculated by using a range of different factors including the list price of the car, the type of fuel it uses and the CO2 emissions it emits according to official emissions figures.

It is calculated by multiplying the price of the car by the 'appropriate percentage' - which is based on the CO2 emissions of the car.

This means the more expensive the car is and the more damaging to the environment it is, the more will need to be paid in company car tax.

The idea is to encourage more affordable, greener cars to be used by UK businesses and this is perhaps one of the reasons why electric car take up has been so popular with businesses in the UK.

BIK and list price

The higher the list price of a car, the more Benefit-in-Kind tax will be payable. The list price is described as the final price of the car including the 20 per cent rate of VAT in the UK and any options added to the car.

This means metallic paint, striking alloys and plenty of gadgets may seem like a good idea for a business car but it will also push up the cost to run the car in terms of Benefit-in-Kind tax.

BIK and fuel type

Diesel cars generally emit less CO2 than an equivalent petrol but they also release a number of harmful emissions a petrol does not.

Things such as particulates (although many diesels come with a diesel particulate filter) means diesel cars are treated more harshly in terms of Benefit-in-Kind tax.

At the moment, diesel cars pay a three per cent surcharge on diesel cars - meaning they will pay three per cent more than a petrol equivalent.

However, this three per cent surcharge will be scrapped in April 2016 and diesel cars will be subject to the same charges as petrol cars.

BIK and CO2 emissions

A car which emits a higher level of CO2 emissions will be subject to higher rates of Benefit-in-Kind tax.

This is split into bands, much like Vehicle Excise Duty is split into bands, and the 'percentage rate' found in the bands is multiplied by the list price of the car to find the Benefit-in-Kind tax level.

The ten per cent rate of BIK tax will cover all cars emitting less than 120g/km in 2011. This will drop to cars emitting below 100g/km in 2012/13 and below 95g/km in 2013/14.

However, all cars under 75g/km will qualify for five per cent BIK tax while zero emissions cars will not have to pay BIK tax.

Above the ten per cent rate, the percentage increase by one per cent for every 5g/km rise in CO2 emissions up to a maximum of 35 per cent for petrol cars (38 per cent for diesels with the surcharge).

BIK in 2012/13

Benefit-in-Kind tax will change next year. The threshold for 15 per cent rate will drop from 125g/km to 120g/km and the ten per cent rate will only apply to cars emitting less than 99g/km.

However, the maximum will remain at 35 per cent.

BIK in 2013/14

In 2013/14, Benefit-in-Kind tax will change again. The main change will be the ten per cent threshold dropping from 99g/km to just 75g/km.

BIK in 2015/16

In 2015/16 it is bad news for electric car drivers as the zero per cent rate for zero emissions cars will be scrapped and all electric cars will have to pay nine per cent rates instead.

How much BIK will I pay?

You can view the full set of tax bands here. By finding the CO2 emissions and list price of the car, you can calculate your BIK tax rate.

Less expensive, greener cars will qualify for significantly lower rates than expensive, polluting cars and this should be a serious consideration for UK businesses when choosing their next set of company cars.