Company cars are a popular perk in the UK, but they come with their own tax implications. Benefit-in-Kind (BIK) tax applies to vehicles provided by employers for personal use. Whether you’re an employer or employee, understanding how to calculate BIK tax is crucial for accurate budgeting and compliance.
In this guide, we’ll break down the process step-by-step and provide useful tips for minimising your BIK tax liability.
What is Benefit-in-Kind (BIK) Tax?
Benefit-in-Kind (BIK) tax is applied to non-cash benefits employees receive from their employers. In the case of company cars, the tax is based on factors like the vehicle’s P11D value, its CO₂ emissions, and the employee's income tax rate. Read our blog for tax free benefits in kind.
For example, low-emission or electric cars often attract much lower BIK tax rates, making them a tax-efficient choice.
How is BIK Tax Calculated for Company Cars?
Calculating BIK tax involves three main components:
1. The P11D Value
The P11D value is essentially the taxable value of your company car. It includes:
- The car’s list price, including VAT.
- Delivery charges.
- Optional extras (e.g., leather seats or premium paint).
It excludes first-year registration fees and road tax. Check your vehicle’s P11D value from your employer or leasing provider.
2. CO₂ Emissions and the BIK Rate
Each vehicle’s CO₂ emissions determine its BIK tax rate, which HMRC updates yearly. Vehicles with higher emissions fall into higher tax bands. For example:
- Electric vehicles (0g/km CO₂): 2% BIK rate (2025/26).
- Petrol/diesel cars (higher CO₂): Rates can exceed 37%.
You can check the official HMRC BIK tax bands for the most up-to-date information.
3. Income Tax Band
Finally, your income tax band determines how much of the calculated BIK value you’ll actually pay.
For example:
- Basic rate taxpayers (20%) pay less BIK tax than higher-rate taxpayers (40% or 45%).
BIK Tax Formula
Here’s the simple formula to calculate your BIK tax:
BIK Tax = P11D Value × BIK Rate × Income Tax Rate
Example Calculation:
- P11D Value: £25,000
- BIK Rate: 25% (based on emissions)
- Income Tax Rate: 20%
BIK Tax = £25,000 × 0.25 × 0.20 = £1,250 per year.
Use tools like Alphabet’s BIK tax calculator to automate these calculations.
How to Reduce Your BIK Tax Liability
Choose Low-Emission or Electric Vehicles
Electric cars, such as the Tesla Model 3 or Hyundai Ioniq 5, have very low BIK tax rates, making them an excellent choice for cost-conscious employees.
Government incentives, such as grants for electric vehicles, further reduce costs.
Opt for Salary Sacrifice Schemes
Employers can offer salary sacrifice schemes for company cars, which reduce your taxable salary in exchange for a vehicle. These schemes often lower your overall tax burden.
Key Deadlines to Remember
- P11D Submission Deadline: Employers must submit P11D forms to HMRC by 6 July each year to report benefits like company cars.
- Tax Payments: Employees should ensure their tax codes reflect their BIK liability.
Final Thoughts
Understanding BIK tax for company cars doesn’t have to be complicated. By knowing the P11D value, BIK rate, and your income tax bracket, you can easily calculate your liability and even explore strategies to reduce it.
Whether you're considering a new company car or managing payroll as an employer, staying informed is key. For further assistance, consult your accountant or HMRC’s official guidance on company car tax.
Disclaimer: This guide is for informational purposes only. Always seek advice from a certified accountant or HMRC for personalised assistance.