BIK Tax – What is Benefit in Kind Tax?
Paying tax on your employee benefits.
Updated on Tuesday 23 November 2021
Employers often offer additional benefits to employees within their remuneration packages as a way of attracting and retaining the best workers.
This can include perks such as company cars, private healthcare, travel expenses and low-interest loans.
For example, if your job requires a regular commute, your employer may provide you with a company car. They are often used to reward staff for loyalty or incentivise good performance, but given that you are likely to use the car for your own personal use, you will be required to pay tax.
This tax, known as benefit-in-kind tax or BIK tax, is levied on many additional benefits on top of your salary, but what exactly is it?
Find out all you need to know right here at Compare UK Quotes…
What is benefit-in-kind tax? How does BIK work?
If you receive a benefit from your employer (on top of your salary or any commission) that can be used outside of work hours, this is considered a ‘perk’ and may be taxable by HMRC.
Sometimes abbreviated to BIK tax, it is most commonly associated with the use of company cars but is also levied on other taxable benefits-in-kind such as accommodation and private healthcare.
Some benefits are not taxable, such as free or subsidised meals and use of an in-house gym, but any benefits-in-kind of significant value will usually be taxable.
Like with your salary, the amount of BIK tax you pay will be determined by HMRC – this will either be calculated using a very particular set of rules, or simply equate to the cash equivalent of the benefit itself.
What does benefit-in-kind mean?
A ‘benefit-in-kind’ is anything received by an employee which is not included in their wage packet – including:
- Company cars
- Private medical care
- Travel expenses
- Accommodation
- Mobile phones
- Childcare
- Gas or electric allowances
Not all of these will be taxed, which is why some perks are more tax-efficient than others, and you should always weigh-up your options before agreeing to a remuneration package.
See our full guide to remuneration packages for more information.
Company car tax – how much will I pay?
The amount of BIK tax that you will be required to pay on a company car is determined by the environmental impact of the car (CO2 emissions), the type of fuel it uses and the value of the vehicle including VAT and delivery charges (known as a P11D value).
Note: From the 2020/21 financial year, BIK tax will not be charged on electric vehicles, or hybrid vehicles with emissions from 1-50g/km and an electric-only range of more than 130 miles.
BIK car tax rates are split into percentages, indicating how much of the vehicle’s P11D value you will have to pay tax on. The higher tax bracket your normal salary falls into, the higher your BIK tax will be.
The new changes made to company car tax that have been implemented from 2020-21 mean that there are now 11 new tax bands for cars with emissions of 75g/km and below.
Some are linked to their electric-only range, which means it can get slightly more complex to work out how much BIK tax is due on your company vehicle.
In short, the more CO2 the vehicle emits per kilometre driven, the more you will be required to pay in BIK tax on your company car.
To work out how much tax your company car will be charged, you can use the government’s online calculator.
Read more: Company Car Tax Explained
Company car tax: Diesel vs petrol
Nearly all diesel vehicles are charged at an additional 4% BIK tax rate because the emissions given off by them are more harmful to the environment.
Diesel is generally cheaper to buy than petrol, meaning the costs can eventually even out.
If you get the choice of either a diesel or petrol vehicle as your next company car, take the time to work out whether you will be covering enough miles to make the extra 4% BIK tax worth it.
How to reduce BIK tax on your company car
If you find that the rate of BIK tax you are being charged is too high, the best way to lower your costs is to ask your employer about changing your vehicle.
By opting for a smaller, cheaper and more modern car with lower CO2 emissions you will fall into a lower tax bracket and therefore pay less BIK tax.
Tax-free benefits-in-kind
There are some benefits-in-kind that are tax-free and should not be entered on your tax return, including:
- Employer contributions into an approved occupational or personal pension scheme
- Discounted or free canteen meals
- In-house sport facilities
- Counselling services to redundant workers
- Some childcare fees
- Bicycles and safety equipment for employees to cycle to and from work
- Equipment provided to carry out your job if you are disabled
Tax and motoring advice with Compare UK Quotes
Whether you’re looking for ways to save money on the day-to-day costs of running a car, looking to get yourself on the road for the very first time or even considering financing a new vehicle, Compare UK Quotes has a range of informative articles which are sure to meet all of your personal finance-related needs.
Related articles:
What is a Remuneration Package?
What is Income Tax and National Insurance?