How BIK Tax Works in Practice
The tax on benefits in kind isn’t paid directly. Instead, HMRC adjusts your tax code to collect the tax through your regular PAYE salary. This process is known as taxing benefits, and it’s essential that employers are accurate in reporting benefits to HMRC to ensure compliance.
The amount of tax you pay depends on the cash equivalent value of the benefit and your income tax rate (20%, 40%, or 45%). The total value and combined value of all benefits provided by your employer are added to your taxable income and total income, which can affect your tax bracket and overall tax liability. For example, if you’re a basic rate taxpayer with a benefit worth £1,000, you’ll pay £200 in tax.
Your employer also pays National Insurance contributions (currently 13.8%) on the value of the benefits they provide. This is known as Class 1A NI.
I once received a company car without understanding the tax implications. My take-home pay dropped by £200 monthly, a painful lesson in how company car tax and BIK tax work! Company car tax is calculated using bik percentage banding, the car's list price, vehicle tax, and factors such as the first year registration fee (or year registration fee).
The calculations can get complex, especially for cars where the benefit value depends on the car’s list price, CO2 emissions, bik percentage banding, fuel type, and other factors. It’s important to ensure the correct amount of tax is paid.
BIK Tax Reporting Requirements
Employers must report all taxable benefits and expenses in kind to HMRC by submitting P11D forms by 6 July following the end of the tax year. They must also submit a P11D(b) form showing the total Class 1A National Insurance contributions due. Reporting benefits accurately is essential for compliance and ensures correct tax calculations.
The deadline for paying Class 1A NI is 22 July (or 19 July if paying by post). Late payments can result in penalties and interest charges.
Employees should check their P11D forms carefully, as the information will affect their tax code. Good record-keeping is essential, HMRC can ask to see evidence relating to benefits and expenses for up to 3 years, so tracking expenses related to benefits is important for accurate reporting.
Ways to Reduce BIK Tax Liability
Not all benefits provided by employers are taxable, some are tax free if they meet certain criteria. For example, certain perks such as free meals, cycle to work schemes, and in-house sports facilities can be tax free, while others may be subject to tax depending on their use and value. Some benefits are exempt from tax if they meet specific conditions. For example, mobile phones provided by your employer (limited to one per employee) are usually exempt.
‘Trivial benefits’ worth less than £50 aren’t taxable as long as they’re not cash or cash vouchers. They also can’t be part of a salary sacrifice arrangement. Electric and ultra-low emission vehicles have much lower BIK rates. This makes them an attractive option for company car users who want to reduce their tax bill. Salary sacrifice schemes can sometimes be tax-efficient. These let you exchange part of your salary for benefits like pension contributions or cycle-to-work schemes.
Business purposes are important when considering BIK tax. Business-only use of certain items may avoid BIK status altogether, but you must be able to prove there’s no personal use. Remember, not all benefits are treated the same, some are taxable, while others are tax free if used solely for business purposes or if they fall under specific exemptions.
Company Cars and Tax
Company cars are one of the most recognisable benefits in kind, and they can have a big impact on your tax bill. If your employer provides you with a company car that you can use for personal purposes, you’ll need to pay tax on the benefit. The taxable value of a company car is calculated based on the car’s list price, its CO2 emissions, and the type of fuel it uses. For example, petrol cars with higher emissions will push you into a higher tax band, meaning you’ll pay more tax compared to lower-emission vehicles.
The amount of tax you pay is also influenced by your income tax bracket, so higher earners will see a bigger deduction. The tax is usually collected through your PAYE code, making it easy for HMRC to adjust your monthly take-home pay. Employers must report the company car benefit on a P11D form and pay Class 1A National Insurance contributions on the taxable value.
Including a company car in your compensation package can be a great perk, but it’s important for both employees and employers to understand how the value is calculated and how much tax will be paid. Choosing a car with a lower list price or lower emissions can help reduce the overall tax impact.
