BIK or Benefit-in-kind is a company car tax levied on employees who are receiving perks or benefits in addition to their salary. If you’re using a company car outside business hours, then you must pay company car tax or a BIK contribution.
Each company car has a set BIK percentage banding which is based on CO2 emissions and its P11D value – this is the list price including extras and VAT, but it does not include the first year registration charges and vehicle tax.
Benefit in Kind (BIK) – What you need to know…
What’s the easy way to calculate Benefit-in-kind?
To calculate BIK tax, simply multiply your car’s P11D value by the BIK percentage banding. Multiply that figure by your tax band, e.g. 20% or 30% or whatever it may come up to, and this will give you the annual tax figure. Your monthly outgoing can be acquired by dividing this figure by 12.
However, this is a very basic-level calculation just to give you a rough idea of how BIK tax calculations work. There’s a lot more nuance to the actual calculation as we will soon find out.
The proper way to calculate BIK tax
BIK tax or company car tax is calculated according to the value of the car, the level of CO2 it emits and your current income tax band. Before you can calculate your BIK tax, you must know the P11D value of your company car. As mentioned earlier, this includes the list price of the company car, including any optional extras it may have, along with VAT and accessories, but does not include the first-year registration fee and VED.
Additionally, you must know which BIK band your car is in. The respective bands are published by HMRC according to the CO2 emissions for all car types, including electrics and hybrids.
It’s important to understand how the BIK band works as it dictates the percentage of the P11D value you will be taxed on – this is referred to as the BIK value. However, the actual amount payable is governed by your income tax band.
Let’s say you drive a car, which has a P11D value registering at £25,315 and a CO2 emission of 125g/km. That puts it in the 30% BIK band. So, the BIK value would work out to be “£25,305 x 30%”, which equals £7,594.
To work out the amount you’ll actually have to pay for company car tax each year, you will multiply this BIK value by your respective income tax band. If you’re a base rate taxpayer (20%), your annual company car tax would be “£7,594 x 20%, which equals £1,518 per year. And so, for a 40% taxpayer, it’s “£7,594 x 40%”, which is £3,038 per year, and so on.
It’s also important to know that BIK tax is a monthly payment, so you do need to divide the figure by 12 to establish the monthly cost. This will be deducted from your pre-tax monthly earnings.
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Current company car tax bands
You can check out the company car benefit percentages in this link which shows the BIK tax bands for recent tax years. The respective bands are based on your company car’s CO2 emissions (this includes electrics and hybrids). However, please note that these bands are only applicable to company cars registered after April 6, 2021.
BIK tax discounts for electrics and hybrids
The BIK tax rates in the link above apply to all vehicles that were registered after April 6, 2021. However, the BIK tax rate for select electric cars stands at 2% right now and will steadily increase up to 5% for the financial year 2027-28.
Extra tax on diesels
Any diesel-driven company car registered between 2018 and 2020 will see a 4% surcharge if it does not meet the current Euro 6d standards – also referred to as RDE2 compliance.
This surcharge will be applied to the BIK band – so, for example, a diesel company car falling into the 24% band will be automatically pushed to 28%. All company cars bought after January 1, 2021 must comply with the RDE2 requirement, which means the 4% surcharge shall apply only to older vehicles.
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Conclusion: Common company car tax terms to be familiar with
For reference, we’ve included the definitions of some key terms around company car tax:
BIK – Benefit-in-kind refers to any benefit received by employees outside their monthly salary. Since we’re talking about company cars in this article, they are taxed as per the employee’s monthly salary.
P11D – This is the form an employer must fill out annually to send to the tax office.
P11D value – This is the value of your company car calculated by taking into account VAT, RRP, delivery and extras like satellite navigation/GPS system, metallic paintwork, etc. It does not include first-year registration fees or VED.
Emissions – This refers to the gas a car emits from its exhaust system, which is measured in “CO2” for company vehicle tax purposes.
g/km – This is the unit used to measure the amount or level of CO2 emitted by a car (grams per kilometre).
Personal tax allowance – The sum of money you earn without tax deduction, which currently stands at £12,570.
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