Understanding Company Car Tax and Benefit in Kind (BiK) and electric cars.

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Company Car Tax is essentially a tax levied on the "Benefit in Kind" (BiK), which an employee avails from their employer in the form of a car for personal use.

The concept of Benefit in Kind (BiK) comes into play when an employer provides a car to an employee for their personal use. In such cases, the employee is liable to pay tax on the perceived benefit that they gain from this provision.

The calculation of this benefit is carried out by HM Treasury. It is derived based on a certain percentage, known as the BiK rate, of the car's "P11D" value (explained further below). This is juxtaposed with the equivalent pre-tax income that an employee could have received.

The BiK rates are defined by the government and can be adjusted to incentivise employers and company car drivers to opt for vehicles with reduced CO2 emissions, such as fully electric cars or plug-in hybrids.

The term "P11D Value" is inspired by a specific form that employers fill out and submit to the tax office associated with their Pay As You Earn scheme. The P11D value of a car encompasses the following:

• The list price of the vehicle
• Any optional extras
• Delivery charges
• Value Added Tax (VAT)
• Employer’s National Insurance

In addition to the BiK tax that the employee is liable for, the employer is also required to pay the Employer’s National Insurance on the calculated BiK value of the car. As of the last update, this rate is currently set at 13.8%.

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Leveraging Benefit in Kind (BiK) Rates to Boost Electric Vehicle (EV) Adoption

Considering that companies acquire approximately 50% of new cars, the Benefit in Kind (BiK) tax offers a powerful tool at the government's disposal to stimulate the transition towards low and zero-emission vehicles. Given its significant impact on an individual’s monthly income, the BiK tax can be a key determinant in vehicle choice.

The HM Treasury tactically uses these tax rates to push for increased adoption of full-battery electric vehicles (BEVs). It also offers a relatively smaller incentive for plug-in hybrid electric vehicles (PHEVs).

In light of the fact that all BEV drivers were subjected to a mere 2% tax in the 2022-23 tax year, and the confirmation that the company car tax rate on electric cars will remain frozen until at least 2025, it can be reasonably expected that the prevalence of fully electric company cars will see a substantial upswing in the coming years.

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Tax for Electric Company Vans

If your employer provides a zero-emission van for personal use, you won't be subject to a van benefit charge. However, for all other types of vans, the current charge for the 2023-24 fiscal year stands at £3,960.

This is projected to change by 2025, when the government plans to standardise the van benefit charge, making it applicable to pure electric vans at the same rate as all other vans.

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Benefit in Kind (BiK) rates for cars registered after April 2020

The table in the attachemnt (PDF) gives you the Benefit in Kind (BiK) rates, or the extra tax you pay, based on how much CO2 a car gives off. It includes electric vehicles and those that run on petrol or diesel.

Until 2025, if you have an electric car that doesn't give off any CO2, you only pay a 2% extra tax. After 2025, this additional tax will go up a little for all cars except those that give off the most CO2. They will still pay the same extra tax, at 37%.

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How Benefit in Kind (BiK) Tax is calculated

P11D value x BiK rate = BiK valueWorked example from 6th April 2022A new Nissan LEAF Acenta has a P11D value of £28,440 and (as a BEV) emits 0g/km of CO2, putting it in the 2% BiK band (percentage rate based on its CO2 emissions).

To get the amount your company car will cost you in tax per year, you then multiply the BiK value by your income tax banding (20-45%).

• In 2023-24, the BiK value will be £28,440 x 2% = £568.80
• £568.80 x 20% = £113.76 per year / £9.48 per month
• £568.80 x 40% = £227.52 per year / £18.96 per month
• £568.80 x 45% = £255.96 per year / £21.33 per month

It is clear that the difference that employees pay for company car tax on electric cars is very significant, when compared with a conventionally fuelled equivalent.