How is Benefit in Kind tax changing for electric cars?

Benefit-in-Kind (BiK), also known as ‘company car tax’, is the tax that you pay if you take a car under a salary sacrifice scheme through your employer. You get taxed a small amount for the benefit of having the car, whilst making other savings on Income Tax and National Insurance.

BiK has historically been very low for electric cars to encourage the uptake of low emissions vehicles as the UK moves towards decarbonising transport.

Before 2021, EVs were exempt from paying any BiK tax. The rate went up to 1% in April 2021, and changed again in April 2022 to 2%.

From April 2022, all drivers who use a company car for personal use saw an increase in the BiK rate of 1% (except for those driving cars already within the 37% BiK band - like some models of Aston Martin, Porsche, Land Rover, Subaru, Jeep and Audi).

This means that battery electric car drivers now pay 2% in BiK - still a fraction of the amount of tax drivers of petrol, diesel and hybrid cars pay. The 2% rate is fixed until April 2025 at 2%, and then will increase by 1% each year until 2028.

Employees pay Benefit in Kind tax on benefits they get from their employer on top of their salary. HMRC treats the benefit separately from your salary, which means you pay the tax before it arrives into your bank account. Any driver who uses a company car for personal use pays BiK tax out of their monthly wage.

Benefit in Kind tax is calculated based on two things: the car’s CO2 emissions and the car’s P11D value. The P11D value is the list price of your car including VAT, combined with any delivery charges, but doesn’t include the car’s first registration fee or annual road tax.

The BiK rates are calculated based on the car’s CO2 emissions. Here are the key things you need to know about the BiK rates:

• The BiK rates range from 2% for zero and low emissions vehicles, all the way up to 37% for cars that create more pollution
• The BiK rate for electric cars has increased from 1% to 2% from 6th April 2022, and is currently fixed until April 2025
• From April 2025, the BiK rate will increase by 1% every year until 2028
  

The low BiK rate of just 2% gives drivers a huge subsidy and employees can make big savings in tax when they switch to an electric car through their employer with salary sacrifice.

Even with the increase in BiK at 2% for electric cars; the tax is much lower than for hybrids, petrol and diesel cars.

Drivers of hybrid cars can pay BiK rates of up to 10 times more than an electric car would pay.

If you already have an electric car through your employer you’ll continue to enjoy super low BiK rates - saving money, and the planet, at the same time.

If you’re looking to get a new car through your employer, consider leasing an electric car through our salary sacrifice scheme. Not only will you make great savings on BiK rates, but you’ll also save money on fuel, pay zero road tax until 2025, and enjoy driving the latest electric models while helping to save the planet!

Our electric car salary sacrifice scheme is free for employers to join and can be set up within just a couple of weeks.

To calculate your BiK rate you need three numbers:

• P11D value
• BiK rate
• Your income tax bracket (e.g. 20%, 40% or 45%)

Here’s the calculation:

P11D value of the car x BiK tax band x your income tax bracket

Here’s an example of how much BiK you’ll expect to pay on an electric car:

An electric car with P11D value of £20,000 x 2% BiK rate x 20% tax bracket = £80 BiK per year.

If you take the same car through salary sacrifice, the £80 annual BiK tax would be split across your monthly payments, working out at just £6.67 per month.

Let’s run the same calculation with a petrol, diesel and hybrid car:

• A petrol car with a P11D value of £20,000 x average 30% BiK rate x 20% tax bracket = £1,200 BiK per year or £100 per month
• A diesel car with P11D value of £20,000 x average 28% BiK rate x 20% tax bracket = £1,120 BiK per year or £93.33 per month
• A hybrid car with P11D value of £20,000 x average 13% BiK rate x 20% tax bracket = £520 BiK per year or £43.33 per month
  

If you’re a shareholder or company director who's looking to make savings on BiK and fuel costs, an electric car is the best choice for you. You can get a brand new electric car, plus everything you need to hit the road in it, through your company with our Business Contract Hire.