What is Benefit-in-Kind tax?

Considering a salary sacrifice car through your employer but wondering about the tax you’ll have to pay? In this article will explain what benefit-in-kind tax is, why you have to pay it and how much you might have to contribute. Plus, why an electric car may save you significant amounts of tax.

 

Summary

  • Benefit-in-kind tax or BiK is a tax payable by employees receiving non-cash benefits from their employer
  • BiK is just 2% for electric cars at the moment

What is Benefit-in-kind tax?

Benefit-in-kind (BiK) is when a non-cash benefit provided by businesses to their employees. Examples of this include company cars, healthcare, childcare and other non-business entertainment expenses. Because they have a monetary value, they must be treated as taxable income.

Benefit-in-kind tax is the tax that employees who receive these perks have to pay. Essentially you pay a small amount of tax for the benefit, but HMRC treats it separately from your salary – so you pay the tax on your pre-tax pay.

Employers are required to report any ‘benefits in kind’ provided to their employees via a P46 form. This is a HMRC form where employers must declare the benefits, so that their staff are taxed appropriately, and any National Insurance contributions are recalculated.

Benefit-in-kind tax on electric cars

BiK tax on electric cars has historically been very low – making a compelling case to go electric. This low tax rate was to encourage a greater uptake of low emission vehicles to help the UK meet emissions targets.

Currently the BiK rate for electric cars is just 2%.

However, it was announced in November 2022, that this will change from April 1st 2025. It will increase by 1% each year thereafter, until it reaches 5% in 2028. This is still considerably lower than many petrol and diesel vehicles so electric car drivers can still enjoy a great tax saving.

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How is BiK calculated?

BiK tax rates are set by the UK government, generally range between 0-37% and are collected through PAYE (pay-as-you-earn). They tend to favour public policy, for example, because the government is trying to promote zero emission cars, the BiK tax for electric cars is really low.

For cars, the BiK rates are determined by the price of the car (its P11D value), how much CO2 the car emits, which fuel the car is powered by and its emissions standards.

How much you pay will also depend on your annual salary and your tax bracket. The calculation to work out your annual BiK tax is as follows:

P11D value of the car X BiK Tax Band X Income Tax Bracket

How does BiK tax on electric cars compare with petrol cars?

Here’s an example of BiK tax on an electric car:

  • Simon earns £40,000 a year so qualifies for 20% income tax.
  • His electric car through his company has a BiK value of £25,000
  • Electric cars have a 2% BiK rate.
  • Therefore: 25,000 X 2% X 20% tax bracket = £100 BiK tax per year.

In comparison, the BiK rates on a petrol car: 

  • Kate also earns £40,000 a year so qualifies for 20% income tax
  • Her petrol car through her company also has a BiK value of £25,000
  • However, the BiK rate for her car sits at 28%
  • Therefore: 25,000 x 28% x 20% = £1,400 BiK tax per year

As you can see there is a huge different in the BiK tax rates between electric and petrol cars. Huge savings can be made by drivers if they choose an electric model. 

Is an electric car through your company worth it?

There are a lot of factors to consider when deciding whether to get an electric car through your company on a salary sacrifice scheme. It is worth calculating your BiK tax contribution based on the cars you like, to work out whether it’s affordable for you. If you get an electric car through your company, you will save money on your tax contributions.

Want to find out more about salary sacrifice with elmo? Head to our salary sacrifice page and see how you could benefit.

FAQs

Do you pay Benefit-in-Kind tax on electric cars?

Yes! But to encourage a greater uptake the BiK tax for electric cars is just 2% right now. Meaning drivers can save money on the tax they pay when comparing to a petrol or diesel car.

Do hybrid cars pay Benefit-in-Kind tax?

Yes! BiK tax is calculated based on the P11D (car value) and the emissions they produce. BiK rates for hybrid cars start at 23%.

How do you calculate your BiK tax?

The calculation for BiK rates is P11D value of the car X BiK Tax Band X income tax bracket. To find out the P11D value of the car, you can find this out from your salary sacrifice providor or the car manufacturer. The BiK rates are all published on Gov.uk and your income bracket you can find this out from your employer. 

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