WHAT IS BENEFIT IN KIND?
Benefit-in-Kind – everything you need to know
HMRC considers a company car available for private use as taxable income. This type of non-monetary benefit is known as Benefit-in-Kind (BiK).
A company car provides many benefits – access to the latest technological innovations; insurance and maintenance covered by the employer; simple exchange for your next car. However, because the car is provided by the employer, the driver will be subject to Benefit-in-Kind tax.
In order to encourage the use of low emission cars, the government sets BiK rates based on CO2 emissions.
How to calculate the value of a company car for tax purposes:
1. Calculate the vehicle’s P11D value
2. Subtract any one-off capital contribution made towards the cost of the car (up to a maximum value of £5,000). This might be made in order to have a car that is more expensive than would otherwise be available
3. Find the BiK rate for the company vehicle
4. Multiply the P11D value by the BiK rate (officially known as the appropriate percentage)
5. Subtract any annual contribution company car drivers make (not including the cost of private fuel)
6. This is the amount on which tax will be payable
7. This calculation should be performed for each tax year that the car is operated, as BiK rates may change from year-to-year.
Because the company car benefit is treated as additional income, company car drivers will pay tax on BiK at their highest rate of income tax.
The treatment of company cars under Optional Remuneration Arrangements (OpRA)
Introduced in April 2017, the government’s new OpRA regulations mean that those drivers who have been given the choice of a car allowance or a company car will be taxed on either the taxable benefit of the car or on the annual value of the car allowance foregone, whichever is the higher. In order to encourage the uptake of ultra-low emissions vehicles, any car with CO2 emissions below 75g/km will be taxed on the taxable benefit of the car, irrespective of the car allowance foregone. The same logic is applied to cars funded through salary sacrifice, where the tax will be assessed on the higher of the taxable benefit of the car and the salary sacrificed.
A nuance to this regulation is that, when determining the amount of taxable benefit of the car to compare with the car allowance, any one-off capital contribution that the driver makes should be ignored. Once the determination of whether tax is to be paid on the taxable benefit or car allowance is made, then the capital contribution can be factored in. An example will make this clearer:
A driver chooses to take a company car with a P11D value of £25,000 and a BiK rate of 20%. In order to have access to this car she is required to make a capital contribution of £2,000. She had the option of a car allowance of £400 per month. To determine whether tax will be payable on the car or the allowance the following calculations are made:
- The taxable benefit of the car, excluding capital contribution, is £25,000 * 20% = £5,000
- The annual value of the car allowance is £400 * 12 = £4,800
- The taxable benefit of the car is greater than the annual value of the car allowance, therefore tax will be payable on the car
Having established that tax is payable on the car, the capital contribution can now be factored into the calculation, as follows:
- P11D value of car is £25,000
- Subtract capital contribution of £2,000
- Leaves £23,000
- Multiply by the car’s BiK rate of 20%
- Gives a taxable benefit of £4,600. This is the amount on which tax is payable
Now consider what would happen if the car allowance was £425 per month rather than £400.
- The taxable benefit of the car (again, before capital contribution) would still be £5,000
- The annual value of the car allowance would increase to £425 * 12 = £5,100
- The annual value of the car allowance is greater than the taxable benefit of the car, therefore tax will be payable on the car allowance
Having established that tax is payable on the car allowance, the capital contribution can now be factored into the calculation, as follows:
- Annual car allowance is £5,100
- Multiply the capital contribution of £2,000 by the car’s BiK rate (20% in this case) = £400
- Subtract this amount from the annual car allowance
- This leaves £4,700 as the amount on which tax is payable