Autocar’s guide to the complicated world of benefit-in-kind tax, giving advice on what you will pay and why
If there’s a third certainty in life, it’s surely that all matters relating to taxation will be horribly complicated. Company car tax is no exception, and when changes are made to the system on a seemingly annual basis, things can become confusing, to say the least.
Put simply, a car made available to you by your employer that you use for work but which you can also use personally outside working hours, including commuting to and from work, is considered to be a benefit second only to the salary you are paid.
HMRC calls it a benefit-in-kind (BIK), a term it applies to any perk or incentive other than your basic salary that’s taxable. Most of us know this tax as company car tax.
How is company car tax calculated?
Many factors contribute to your company car tax bill, but the first is the vehicle’s value, commonly known as its P11D value after the form your employer gives you detailing your various company benefits.
The P11D value is the car’s list price, including options fitted to it, plus VAT and delivery charges but not its first registration fee and road tax. Remember, it’s the vehicle’s list price, not its discounted price, that’s considered. Also, there’s no point trying to save money by taking a used company car rather than a new one, because the same calculation applies.
The car’s P11D value is then multiplied by the income tax bracket you fall into (20%, 40% or 45%) and its BIK tax rate. The BIK rate is based on your company car’s official CO2 emissions, the type of fuel that powers it and, if it’s a hybrid, its electric-only range.
CO2 is the primary factor here, because the government wants to incentivise us all to drive cleaner cars. The lower the car’s CO2 emissions, the less tax you pay.
Calculating BIK rates and tax charges
The amount of CO2 a car emits is calculated from a series of tests called the World Harmonised Light Vehicle Test Procedure (WLTP). This tough new test was introduced in September 2018 but wasn’t applied to all new cars until 6 April 2020. Between the two dates, some cars were tested under the earlier, less stringent emissions test, called the New European Driving Cycle (NEDC).
Cars tested under the NEDC test generated more flattering CO2 emissions figures, so to make things fairer between them and WLTP-tested cars, those registered before 6 April 2020 have so-called NEDC-correlated BIK rates; while from the tax year 2021/22, those registered from 6 April 2020 have 1% deducted from their BIK rate. To avoid confusion, the rates are displayed on different tables (see the BIK rate tables below).
Whether it was tested under WLTP or NEDC, to find your car’s BIK rate, you must first know its CO2 emissions figure. Having obtained this, perhaps from your fleet manager or car supplier, refer to the BIK rate table appropriate to when the car was first registered (before or after 6 April 2020).
Locating your CO2 figure (it will fall within a band or range) will give you the car’s current BIK rate, expressed as a percentage. Taking your car’s P11D value, multiplying it by its BIK rate and multiplying the resulting figure by your income tax band – for example, £20,000 x 25% x 20% – will give you your annual BIK tax charge, which in this case is £1000.
Note that BIK rates have a tendency to change every financial year, although in 2020, the government announced that BIK tax rates published in 2019 will be adopted and frozen at 2022/23 levels for an additional two years. The highest BIK rate is currently 37%.
Calculating the BIK rate on diesel cars
From being the darling of the environmental lobby, diesel cars are now largely frowned upon, with the result that emissions tests have become tougher for them. The latest, mandatory on all new diesels sold from January 2021, is called Real Driving Emissions Step 2 (RDE2).
Diesels registered before this date that aren’t RDE2-compliant (some gained RED2 compliance early, so check with your supplier) attract a 4% surcharge on their published BIK rate, up to 37%. Remember that if you’re considering a used diesel as your company car. To be clear, all new diesels are RDE2-compliant, meaning the 4% surcharge does not apply.
Diesel-electric hybrids are classed as alternatively fuelled vehicles so avoid a surcharge whether they’re RDE2-compliant or not.
Calculating the BIK rate on electric cars
Zero CO2 emissions ensures that electric cars enjoy the lowest BIK rate. In the tax years 2020/21, it was actually 0%; but in 2021/22, it rose to 1%; and from 2022/23, it will be 2%. Either way, EV drivers pay much less company car tax than others.
Calculating the BiK rate on hybrid and plug-in hybrid cars
Owing to their low CO2 emissions, hybrid and plug-in hybrid (PHEV) cars enjoy the next lowest BIK rates. However, since their emissions are linked to them being able to travel on battery power alone, their BIK rates are calculated using a combination of CO2 emissions and official electric-only range.
There are five BIK rate bands for hybrids. Cars with an electric-only range greater than 130 miles attract a rate of 1% in the 2021/22 tax year (although no such hybrid yet exists). At the other extreme, those with an electric range of fewer than 30 miles (a lot of them) pay 13%, rising to 14% in 2022/23.
Company car tax bands
Check the tables below to see which BIK rate your chosen company car attracts, taking note of the registration period, whether pre- or post-6 April 2020.
Vauxhall Corsa 1.2T 100 Elite (new)
The Corsa is a big hit with company car drivers seeking sharp looks, good performance and a low tax bill.P11D price: £19,295CO2 emissions: 118g/km 2021/22 BIK rate: 27%BIK bill (2021/22): £5210Basic-rate taxpayer (20%): £1042 annual BIK chargeHigher-rate taxpayer (40%): £2084 annual BIK charge
Volkswagen Golf GTI 2.0 TSI 245 (new)
Company car tax might seem a burden, but you would struggle to put this hot hatch on your driveway for £2500 per year.P11D price: £33,065CO2 emissions: 168g/km 2021/22 BIK rate: 37%BIK bill (2021/22): £12,234Basic-rate taxpayer (20%): £2447 annual BIK chargeHigher-rate taxpayer (40%): £4894 annual BIK charge
BMW 120d M Sport (new)
This sporty BMW shows that choosing diesel over something like the more expensive Golf GTI still offers tax advantages.P11D price: £34,170CO2 emissions: 133g/km2021/22 BIK rate: 30%BIK bill (2021/22): £10,251Basic-rate taxpayer (20%): £2050 annual BIK chargeHigher-rate taxpayer (40%): £4100 annual BIK charge
Volkswagen ID 3 Pro Performance Business (new)
Volkswagen’s new electric family hatchback shows how running an EV brings your tax bill right down.P11D price: £36,975CO2 emissions: 0g/km 2021/22 BIK rate: 1%BIK bill (2021/22): £370Basic-rate taxpayer (20%): £74 annual BIK chargeHigher-rate taxpayer (40%): £148 annual BIK charge
Toyota Prius Plug-in Hybrid 1.8 VVT (new)
A combination of low emissions and a 35-mile electric-only range ensures this plug-in hybrid attracts a tax-reducing BiK rate.P11D price: £32,590CO2 emissions: 28g/km2021/22 BIK rate: 11%BIK bill (2021/22): £3585Basic-rate taxpayer (20%): £717 annual BIK chargeHigher-rate taxpayer (40%): £1434 annual BIK charge
Skoda Octavia iV 1.4 TSI SE Technology
This plug-in hybrid hatchback shows just how low these cars can go, thanks to its electric-only range of 43 miles and low CO2 emissions.P11D price: £31,170CO2 emissions: 21g/km2021/22 BIK rate: 7%BIK bill (2021-22): £2182Basic-rate taxpayer (20%): £436 annual BIK chargeHigher-rate taxpayer (40%): £873 annual BIK charge
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