Beyond casual Fridays, employers can offer all kinds of perks including company cars. Besides the obvious benefit of having your own set of wheels, you can also make savings with BIK hybrid tax.
BIK: Hybrid and electric cars
First things first. A company car is known as a benefit in kind’ (BIK). This means a company benefit that is not cash but has monetary value, such as a car. Like a salary, employees have to pay tax on this benefit.
However, thanks to the advent of electric and hybrid cars, you can pay less tax UK whether you’re an employee or an employer.
Changes to electric car BIK rates in 2020
In a bid to encourage UK motorists to consider greener options, the UK government announced new changes to BIK tax for electric cars in April 2020.
Employees who had opted for an electric car in April 2020 (note the car must have been registered after this date) benefited from 0% BIK tax for the year. From thereon, any cars with emissions of less than 50 g/km or an electric range of more than 130 miles would pay minimal tax 1% in 2021/2022, and 2% for 2022/2023.
If your car has this range and was registered before April 2020, you could still savings just 2% for the next five years.
BIK for hybrid cars
So, where do hybrids fit into this? The calculations are all based on emissions, so while there are BIK hybrid savings, they’re not as good as fully electric cars. The calculations correlate with electric ranges, so generally, we see a flat rate for cars with more than 130 miles of electric range.
This stays the same for cars registered before April 2020 up until the year 2025. For newer cars, the tax rate is 1% for 2021-22, then 2% for the next three years.
If your car has emissions higher than 50 or an electric range of <130 miles, you can still benefit from tax savings. Generally, hybrid cars are taxed at 22%. This sounds high, but compare it to a petrol or diesel vehicle with emissions of 170g/km, and the tax is 37%!
How is company car BIK tax calculated?
But enough about percentages if you’re choosing a company car, whether you’re an employee or an employer, you’ll want to know how much you’re paying out.
Benefit in kind for cars is calculated based on the car’s P11D value. This is the list price of the car including VAT and delivery charges, but not registration fees or road tax. The tax you pay as an employee is this value multiplied by the BIK rate and your income tax rate:
- Basic rate: 20% for salaries of £12,571 to £50,270
- Higher rate: 40% for salaries of £50,271 to £150,000
- Additional rate: 45% for salaries of £150,000+.
So, let’s say you choose a car registered in April 2021, with a value of £40,000, and you pay a 20% rate.
The car is fully electric, so it’s subject to a 1% BIK tax. Therefore:
£40,000 x 1% = £400. £400 x 20% = £80 per year.
Sounds a lot nicer than 37%, doesn’t it?
A higher rate taxpayer with a high emissions car may have to pay:
£40,000 x 37% = £14,800. £14,800 x 40% = £5,920 per year.
Benefits for employers
While drivers can make significant tax savings, there are perks for employers, too. Every fully electric car (not hybrid) is eligible for a special type of allowance, which means you can subtract this from your profits. Corporation tax is charged at 19%, so if you were to invest in a £40,000 car, you could save £7,600:
Car with P11D of £40,000 x 19% corporation tax = £7,600 per car, per year.
And that’s not all. Beyond happier staff, you’ll also benefit from:
- Zero road tax on electric cars and low emissions cars up to 100g/km
- Free parking in ULEV parking areas
- No congestion charge in London.
Should I offer company cars to employees?
You can make a huge impact on the environment and your finances with greener cars. To maximise your tax savings, contact UWM today.
