BIK on Electric Cars: A Green Incentive for Company Car Buyers

When it comes to job perks, a company car often ranks high on the list of desirable benefits. However, owning or leasing a car can come with its own set of costs and responsibilities. Enter the concept of Benefit in Kind (BIK) tax, a method employed by companies to encourage employees to choose eco-friendly vehicles.

In this article, we delve into the world of company car tax, examining how BIK on electric cars can provide an attractive incentive for both employers and employees alike.

How does company car tax work?

Company car tax, also known as Benefit in Kind (BIK) refers to the additional benefits provided by employers that are not included in an employee's regular salary. While certain BIK perks are exempt from tax, like commuter schemes or free lunches, others require employees to pay taxes on their value.

The tax on your company car is typically deducted from your pay and handled by your employer through the PAYE (Pay As You Earn) system. It's important to note that you won't be taxed on the entire value of the company car. The amount of tax paid depends on various factors, including the cost of the car, its carbon dioxide (CO2) emissions, and the employee's earnings.

What is the BIK tax rate on electric company cars?

The current taxable BIK rate on electric cars is set at 2%. This rate will remain unchanged for the 2023/24 and 2024/25 financial years. However, starting in the 2025/26 financial year, the taxable rate will gradually increase by 1% each year.

This means that:

• In 2025/26 it will be 3%
• In 2026/27 it will be 4%
• In 2027/28 it will be 5%

Vehicle BIK bands vary every year and are often adjusted to reward more efficient models. It aims to encourage employers and company car drivers to choose ultra-low-emission vehicles instead of conventional models. This helps reduce pollution and improve air quality in urban areas, which is a key priority for many governments.

BIK tax for hybrid cars

Hybrid vehicles' EV driving range determines their BIK rates. Hybrids with a conventional charger have a limited electric range and emit more than 50g/km of CO2. Because of this, they are taxed the same as petrol or diesel cars. Tax incentives are greater for plug-in hybrid vehicles (PHEVs) due to their electric range and emissions of less than 50g/km of CO2.

PHEVs emitting under 50g/km of CO2 are calculated as follows:

• Under 30 miles in battery mode, the BIK rate is 14%
• Between 30-39 miles, the BIK rate is 12%
• Between 40-69 miles, the BIK rate is 8%
• Between 70-129 miles, the BIK rate is 5%
• Over 130 miles in battery mode, the BIK rate is 2%. It is taxed as though it were a fully electric car

Are electric vans liable for company car tax?

Electric vans supplied by companies do not require company car tax. Additionally, using the van for personal use does not incur a Benefit in Kind charge.

Calculating BIK on electric cars

BIK on electric cars is calculated by multiplying the BIK tax banding (2%) with the vehicle’s P11D value (i.e., the list price plus VAT and extras, but excluding the first-year registration fee and vehicle tax). The BIK value is then multiplied by the employee's income tax bracket. This can be either 20%, 40%, or the additional rate tax band of 45%.

Here are two simple sums to help you:

Step 1: BIK tax rate x P11D value = BIK value

Step 2: BIK value x tax band = BIK tax

Step 3: BIK tax ÷ 12 (or 13 if paid on a 4-weekly basis) = monthly BIK amount

A company car's BIK value is determined by several factors, including:

• Tax year
• The vehicle's make and model
• List price minus employee contributions towards the car
• The P11D value
• CO2 emissions from the car
• Amount of time the car is used

BIK rates differ for cars registered before and after April 2020, when the way emissions are measured changed.

Ready to go electric?

The government's commitment to promoting low-emission vehicles and reducing carbon footprints is reflected in the favourable BIK rates on electric cars. With zero tailpipe emissions, electric vehicles enjoy substantial benefits, offering a level playing field for employees of all income levels. The decision to freeze the current tax rates until April 2025 provides a sense of stability and certainty, allowing employers and employees to effectively plan their finances. As we move towards a greener future, these incentives encourage widespread adoption of electric cars and contribute to a more sustainable transportation landscape.

If you are ready to take the plunge, dont forget to arrange your motor fleet insurance.

Disclaimer: Bluedrop Services are not Tax advisers, for Tax advice companies should contact a Tax professional.