BIK - A guide to company car tax

All you need to know about “benefit in kind”; including how it is calculated and what it means for you as a company car driver.

When a company vehicle and company fuel is made available to an employee or director for private as well as, although not necessarily, business usage it is classed as an employment benefit and is therefore liable to income tax. The amount of income tax that the employee or director pays on the vehicle and fuel is based on a calculated figure known as the “benefit in kind” value. Simply the employer, or the company you work for has provided you with something which offers financial benefit, therefore it has a taxable value.

Benefit in kind is calculated using the vehicles P11D and C02 output. The P11D is the cost of the vehicle including all the manufacture options and any other extras so, as the vehicle cost increases so does the tax liability. The C02 output of a vehicle is also a deciding factor in the eventual benefit in kind as the C02 increases so does the benefit in kind payable, so in short the more expensive and the more C02 output the more it will cost on payable tax. If you want to calculate your benefit in kind, click here to find the car you want, and see its current C02 output. There are tax liability illustrations attached to all the vehicles offered however, the chart for making these calculations is shown below.

Commonly asked questions and answers

Q: What is company car tax?

A: A tax which is payable on a certain percentage of the total P11d value of your car. The percentage paid is based on the emissions of the car. People earning £50,271 per year or less will have to pay 20% of this amount in tax, and people earning over that amount will have to pay 40%. If you’re lucky enough to earn over £150,000 each year you'll have to pay 50%. This is normally deducted each month from your salary.

The P11D value of your car is used to calculate the amount of company car tax you pay.

P11D is actually the name of a form filed by employers and sent to the tax office with which their Pay As You Earn scheme is registered.

The P11D value of your car comprises the list price, including VAT, plus any delivery charges, but does not include the car’s first registration fee or its annual road tax.

Some manufacturers' pricing does not contain a specific delivery charge, but it won't make a difference to your tax bill compared with equivalent models from other brands because they would be benchmarked at the on-the-road price.

For example, car A is priced at £15,480 on the road. It is made up of £14,655 list price (basic price plus VAT), £645 delivery fees, £125 annual Vehicle Excise Duty and £55 first registration fee.

Its P11D value would be £15,300 - list price plus delivery fees, but without road tax and first registration fee.

Meanwhile, car B is also priced at £15,480 on the road. Its manufacturer does not list a separate delivery charge, but the list price is stated as £15,275. It is subject to VED at £150 a year, and a first registration fee of £55. Therefore the P11D value is £15,275.

Choosing factory-fit options in your company car will have a direct impact on its P11D value, with the full value of the option contributing to the total.

To calculate annual company car tax the P11D value is multiplied by the percentage rate of income tax you pay (20 per cent or 40 per cent) and by the benefit-in-kind tax band dictated by the car's carbon dioxide emissions.

Q: Are there any dispensations for low-emissions cars that aren't 100% electric?

A: Special bands based on fully electric range are place for cars that emit below 50g/km CO2. They'll be illustrated in the table below.

Q: Is there a maximum price cap on the amount taxable on a company car?

A: No, although the highest BIK % is 37% of the list price.

Q: Why are diesels so popular?

A: The simple answer is they produce less CO2, so the tax bill should be smaller.

However, they are usually significantly more expensive to buy than an equivalent petrol version, so you have to make sure the higher P11D price doesn't outweigh any advantage from a lower tax band.

You also need to do your homework on fuel costs, because diesel costs more at the pumps than petrol and you need to meet the predicted fuel economy figures from the manufacturer to gain a real benefit.

Q: Are electric cars exempt from company car tax?

A: No, they are currently in the 1% bracket, which still makes them extremely desirable to a company car driver.

Q: What about hybrid cars? Where do they come into it?

A: Hybrid cars currently conform to the same tax rules as petrol cars. This means they sit in lower bands, so you'll pay less tax for owning them.

Q: What about the rules for vans?

A: Light commercial vehicles, including double-cab pick-up trucks with payloads in excess of 1000kg, are classed as a benefit in kind if they are also provided for private use.

Unlike cars, tax on use of commercial vehicles provided by an employer is levied at a flat rate.

Currently this is £3,500. Therefore a basic rate taxpayer would owe the treasury £630 a year, while a higher rate taxpayer would have an annual bill of £1260.

Q: So how much should I expect to pay in company car tax?

A:  Click here to go to our benefit in kind Calculator.

The table below outlines the tax payable on company cars over the next few years, arranged with by a car's emissions output:

The below rates are frozen until 2024/25

Familiar company car tax terms

Additional rate - this is a tax rate for people earning over £150,000 each year, and is payable at 45%.

Higher rate - for 2022/23 employees earning between £50,271 and £150,000 a year, a higher rate of tax is payable. With regards to company car tax, they are eligible for a 40% tax rate.

Basic rate - for 2022/23 employees earning between £12,571 and £50,270 a year, a lower rate of tax is payable. With regards to company car tax, they are eligible for a 20% tax rate.

Benefit in kind (BIK) - this is any benefit which employees receive from employment but are not included in a salary. The obvious example in our case is company cars, which are taxed according to the income of the employee.

Emissions - the amount of gas the car emits from the exhaust. Measured in terms of CO2 for company car tax purposes. 
g/km - the level of carbon dioxide emitted by a car is measure in grams per kilometre.

P11d - this is the form that each employer must fill in annually and send to the tax office.

P11d value - this is the value of your car including RRP, VAT, delivery and any extras (such as metallic paint or satellite navigation). It does not include road tax or first registration fee.

Personal tax allowance - this is a sum of money that you're allowed to earn without being taxed upon it. For 2022/23 this amount was £12,570.

Recommended retail price (RRP) - this is the amount the car manufacturer thinks its car is worth. It's likely that some RRPs will be very different from the actual price the customer pays for the car thanks to heavy discounting, so be aware that you may end up paying far higher tax on your car than you thought.

Vehicle Excise Duty (VED) - this is payable on all cars, and is based on the CO2 output of the car in question