The words ‘benefit in kind’ sound warm and fluffy, summoning visions of charitable deeds like jam competitions and fund-raising dinners. But if you’re a company car driver, these words will strike fear into your heart. BIK is the tax which is taken out of your pay packet every month if your employer gives you a car which you can use for personal miles, such as going to see your gran at the weekend.
The tax was brought in during the heady days of the 1980s when companies started to give cars as a ‘perk’ of employment instead of money which would have attracted tax. Over the years it has evolved to try and ensure people aren’t taxed unfairly (such as by having a van that they need for work) and to encourage drivers into ‘greener’ cars.
Controversially this worked to encourage drivers into diesel cars in the 1990s by basing the tax on the CO2 exhaust emissions. Now there is an extra levy on diesels, but the cost of having a traditional company car is still pretty punitive. A 40% taxpayer in a modest mid-range Focus will find an extra £200 disappearing from their wage slip deductions every month, for example. For posher cars, it can rise to thousands.
Which is one of the reasons why there is suddenly such an interest in electric cars. The current rate is just 1% percent benefit in kind chargeable on fully electric cars, rising to 2% for 2022 and fixed there until 2025. Plug-in-hybrids also have reduced rates, although the savings aren't as dramatic.
The 1% (and later 2%) rate will apply to any pure electric vehicle, whether it is new or used. It will also apply to a car registered after 6th April 2020 which is a plug-in hybrid with official exhaust emission levels of less than 50g/km and an electric-only range of 130 miles or more. This is currently a little pointless however as we can’t think of any cars which currently meet this requirement, but presumably there are engineers beavering away to make something which will hit this threshold.
The savings compared to a conventional car are massive. For example, if you chose a Tesla Model X as a company car rather than an Audi SQ7 you’ll save more than £20,000 in income tax every year. The cost for the Tesla tax will be just £600 in 2021/22.
The savings on a ‘normal’ family-sized car such as a Nissan Leaf versus a Ford Focus aren’t quite as dramatic, but will still be a four-figure sum. There are even reasonable savings to be made by swapping a hybrid for a PHEV. For example, if you are running a Prius as a company car and are a 40% taxpayer, taking the plug-in version over the normal hybrid will save you just over £1,000 a year.
For companies there are big savings too. Firms who purchase an electric car outright (rather than leasing) will be allowed full tax relief on the cost in the year of its purchase. For an electric car which cost £35,000, that’s a £7,000 saving in tax relief for the year.
Even if you aren’t entitled to a company car, or perhaps choose to take a car allowance instead, there are still ways you can save. Salary sacrifice schemes mean the cost of leasing an electric car can be taken out of your gross pay, saving you a substantial sum – more than 40% if you are a top rate taxpayer. You can read more about that here
However you get your new electric car, you can be sure that going electric will plug into some big savings over the next few years. Now you understand the tax, it’s time for the fun part – choosing a car. Check out our top BIK picks on the Company Cars tab at the top of this page.