Benefit in Kinds (BIK) Tax – A quick breakdown

A benefit in kind is a benefit given by the employer to an employee, so long as it’s not a cash benefit. There are many types, the most high value of which is typically a company car. But for every benefit in kind comes a tax, primarily compared with how much tax personal tax rate an employee makes.

But for every benefit in kind comes a tax, which leads us to the question: what is a BIK tax? RealBusiness has put together this article to break down what the tax is, why it’s in place, how to manage it, and more.

What Is Benefit in Kind (BIK)? 

This means it’s a specific term not used solely for a company car. Insurance, accommodation, memberships to gyms, etc., are all a form of benefit in kind. Just like how a salary increase means you pay more tax to the government, a benefit in kind will also be taxed based on its value. However, unlike a salary increase, this taxation will be applied to the company as they are technically the owners of the right.

According to HMRC Tax and NIC statistics, company car tax – a component of BIK – generated over £2.46 billion in tax revenue in the 2018/19 tax year. This is because HMRC sees benefits in kind as cash value. A company car binds you with terms and conditions by a company, but you’re almost always allowed to use it in your personal life. This monetary value is added to income tax.

BIK Rate And Tax Band

There are two additional considerations to make when looking at BIK Rates:

• Annual Change – BIK rates are not fixed, but changed annually. This means that if you’re to make the most efficient decision with BIK rates, you must monitor it.
• Income Tax Banding – Employees who earn high wages and pay tax at a higher rate will determine the company car tax rate.

Company Car BIK Tax

Glassdoor’s “Mission and Culture Survey” of 2019 indicates that 57% of employees consider fringe benefits and perks to be among the most major factors in job satisfaction, and a company car is possibly the most valuable asset compensation packages you can receive.

Many companies have utilised company cars to attract the top talent in the marketplace. These company vehicles are usually high value and expand an employee’s assets significantly, making them highly sought-after fringe benefits that repay the company’s expense in waves. A perk as sophisticated as a car isn’t going to be dealt out without costs, of course. While the purchase price, insurance, maintenance, and possibly fuel are not always covered by the company, a company car tax is one of the only benefits in kind that are charged to employees.

It’s important to note that whilst many Benefits in Kind Taxes are charged to the employee, a company car is one of the few exceptions. The employer pays the BIK rate, as a company car is seen as primarily business-related, with private use considered secondary.

The following are factors that are used to calculate BIK tax:

• P11D Value – This is a term that encompasses the value of the car. These costs are the list price, any optional extras and VAT. However, it doesn’t include the first-year registration fee and vehicle tax.
• CO2 Emissions – One way in which the government is trying to incentivise the reduction in CO2 Emissions in the UK is by giving a lower BIK tax rate to cars with lower CO2 emissions.
  • Electric range – If the new car emits no or little fuel by incorporating electricity, this would favorably change how much BIK tax a company pays.
    • Standard hybrid vehicles – Standard electric car hybrids have benefit in kind taxes between 15% to over 37% applied.
    • Plug-in hybrid vehicles – Benefit-in-kind tax for plug-in hybrids is scaled between 2% to 14%.
    • Electric cars – Almost tax-free for fuel, 2% across the electric car range.
• Fuel Type – Similarly, the environmental impact of the fuel in a company car will affect the BIK Rate. Diesel cars, for example, were once well-loved for their high fuel efficiency, but their CO2 emissions have made them obsolete for the new, green direction companies are going in.

Calculating Company Car BIK Tax

The following is the short but complete calculation of a company car BIK Rate: BIK Tax = P11D value x BIK rate x employee’s tax rate.

Let’s illustrate with a real-world example:

• Car – Tesla Model 3 Standard Range Plus (2023)
• P11D Value – £48,490
• CO2 Emissions – 0 g/km (Electric car)
• BIK Rate – 2% (2023/24 tax year)
• Employee’s Tax Code – 40% (Higher rate taxpayer)

Benefit in Kind: The Types And Rates

The following is a list of Benefits in Kind that an employer may give out to their employees. We have sorted them in order of capital value and expense, however, it’s important to bear in mind that the following are BIK rates paid by the employee.

This is because these BIKs are not primarily made for use in work and have benefits outside of it. We have sorted them from the most costly in terms of capital.

Accommodation

When a company offers accommodation, it’s usually purely to attract skilled workers from afar. The higher the level of skill and certification a person is, the more a company will have to compete to acquire them.

The BIK tax on accommodation is calculated based on the property’s annual value or the amount of the allowance. For the tax year 2023-2024, the rates range from 0% for properties with an annual value up to £75,000 to 10% for properties valued over £200,000. These rates are then applied to the employee’s income tax band.

School Fees

Course fees, school fees, etc., all serve to develop your talent. The fees that you pay for courses and private schools are made back when your staff increases their productivity and begins to specialise in areas of the business that directly affect the bottom line.

The BIK Tax rate for school fees is taxed as regular income for the employee’s marginal tax rate. This can reach as high as 45% for high earners.

Low-Interest Or Interest-Free Loans

Loans given by the company to an employee provide a great advantage for an employee. It allows them to fund significant ventures, such as buying a home or consolidating their debts.

The difference between the interest the employee would have paid on a comparable loan from commercial lenders and the interest (if any) that they pay with the company loan is what determines the BIK rate. This figure is then taxed at the employee’s marginal tax rate.

Private Medical Insurance

Private healthcare is essentially a first-class ticket to better health. It offers lower wait times and superior service. As a result, it’s a very nice perk that puts a lot of employees at ease. A lot of private insurance companies have policies that allow them to treat already existing conditions, provided the person has been insured for at least two years or more.

The BIK Rate for PMI depends on the cost of the premium and whether or not it extends to the family of the employee. The rates are as follows:

• Employee only: 13.25% of the gross (pre-tax) premium
• Employee and one adult: 26.5% of the gross premium
• Employee, one adult, and children: 39.75% of the gross premium

Conclusion

BIK Tax is meted out on a case-by-case basis. Considering you have no control over HMRC’s annual BIK rate, and high-valued employees have the power to negotiate for higher wages, the only real way in which you can control the BIK rate is in your choice of company car.

FAQ: How is BIK Tax paid? 

BIK tax is usually paid by the employee and taxed through the PAYE system, which automatically tallies and pays taxable income (such as national insurance contributions) on the employee’s behalf. Company directors, must file through their self-assessment tax returns.

It’s important to note, however, that employers play a role in how BIK tax is paid. Employers act as tax collectors for the HMRC by deducting the appropriate amount from the gross salary of the employee, just as they do for any other tax.

FAQ: Are any BIKs exempt from tax? 

Yes, there are.

• Childcare – Providing childcare facilities on-site or vouchers for childcare is a valuable benefit for working parents. Since it’s classed as supporting working families, no BIK tax is applied.
• Cycling – Including safety equipment, cycling is also another BIK that’s exempt from tax thanks to the Cycle to Work Scheme, promoting cycling as a form of transport.