Everything You Need to Know About Benefit-in-Kind Tax

Benefit in Kind Tax

If there’s one universal truth, it’s that there’s no such thing as a free lunch. Or a free company car. If you run a business that supplies cars to its employees, or if you’re an employee who receives a company car, you’ll need to be aware of the benefit-in-kind tax you owe.

Benefit-in-kind tax is a tax on noteworthy company benefits, most commonly referring to a company car. This tax is paid by the employee, alongside their standard income taxes. The exact tax is calculated using the car’s make and model, as well as its emissions.

While benefit-in-kind tax is largely associated with business cars, it can apply to other benefits, like living accommodation, medical insurance, and loans. Benefit-in-kind tax doesn’t apply to fuel cards, which fall under the umbrella of “small enough not to worry about,” alongside free meals and on-site gyms. If you’re interested in a fuel card for your own business, you can use our free quote tool to nail down some estimates of how much it would cost you.

What Is the Benefit-in-Kind Tax?

It’s an odd name, “benefit-in-kind tax.” Not as immediately understandable as “income tax” or “property tax,” so what is it? Basically, it means that as an employee, if you’re given a significant benefit (for example, a company car), that benefit will come with its own tax implications.

For example, if you’re given accommodation through your work, you’ll need to pay a bit of tax on that, as you’d be missing out on paying standard property tax, and we can’t have that. Benefit-in-kind tax won’t break the bank but is still considerable and necessary for any large company benefits, like cars or homes.

The exact amount paid will rely on various factors, like the value of the car/property, the car’s emissions, and the kind of car it is (diesel, electric). This tax is calculated by the business and removed from the employee’s pay, so the employee themselves won’t need to calculate it, though they should be aware of it.

How Do You Calculate the Benefit-in-Kind Tax?

To calculate benefit-in-kind tax for a car as an example, multiply the P11D value of the car model alongside the vehicle’s BIK percentage band, which is determined by the vehicle’s average CO2 emissions. Finally, multiply that figure to receive the amount of tax needed to be paid.

To make things easier, you can use HMRC’s calculator and forms.

The BIK rate will be increased slightly if the vehicle is a diesel vehicle. But the good news is that if the vehicle is electric, you won’t need to pay any benefit-in-kind tax for the first two years, and only 2% from then on. Another reason to go green!

If you have use of a company car with free fuel during your personal time, unfortunately, that fuel isn’t actually free. To determine how much tax you should pay on the fuel, you’ll need to calculate the car’s benefit in kind with a fuel charge multiplier.

Once you have your figure, you can work out whether it makes more sense to receive ‘free’ fuel, or to fill up yourself. That will depend on your fuel consumption and mileage.

It bears emphasis that while benefit-in-kind tax is paid by the employee, not the employer, the employer still needs to calculate it and remove it from the employee’s final payslip, just like standard income tax, so the average company-car enjoyer won’t need to worry about figuring it out themselves.

Are Fuel Cards a Benefit-in-Kind Benefit?

When used for business purposes, fuel cards are not classed as taxable benefits by the UK government. The only situation in which you’d be liable to pay benefit-in-kind tax on a fuel card, is if it was used to cover the cost of personal travel.

While they may fall under the umbrella of company benefits (as some employees may be allowed to use the company fuel cards to fill their own vehicles), the fact that it’s being used in a professional capacity ensures that it’s tax-free.

Fuel cards aren’t the only company benefit that flies under the radar of benefit-in-kind tax. Company meals, company gyms, or any resources that are shared and available to all employees equally are not taxable benefits.

Next Steps

The good thing about benefit-in-kind tax is that you likely don’t have to worry about the next steps. If you’re in the position to need to worry about benefit-in-kind tax, your employer will manage it before you even receive your salary.

However, you may be an employer looking to figure out how to optimize your payroll process, and finding yourself a bit stuck at benefit-in-kind taxes. If this is the case, you could use the help of a payroll service, which can ensure that you’re all set when it comes to paying your employees and their taxes.

If you’re worried about whether or not you need to pay benefit-in-kind taxes on fuel cards, you can rest easy. As long as it’s purely for work purposes, you won’t need to worry about it. If you’re interested in a fuel card, you can get free quotes through our quote comparison tool. By entering your business’ information, you’ll be able to receive quotes from various fuel card providers, allowing you to make the best decision.

Written by:
Duncan Lambden
Duncan (BA in English Textual Studies and Game Design) is one of Expert Market's local Software Experts. His articles focus on ecommerce platforms and business software that allows small businesses to improve their efficiency or reach, with an emphasis on invoice financing, project management, and customer relations.
Reviewed by:
Maïté Bouhali
Maite began her career with Expert Market nearly four years ago as a writer. She quickly developed a passion for the challenges faced by small businesses and now endeavours to help them make informed decisions for their future. In her current position as Business Software Editor, Maite works closely with writers to ensure that each article is informative, well-researched, engaging, and actionable for readers. With extensive knowledge of CRM, vehicle tracking devices, and fuel cards, she is meticulous in her review of each article and provides detailed feedback before publication. Whether you're seeking to stay informed on the latest trends in business software or need guidance in selecting the most appropriate software for your organisation's needs, Maite is here to help. With her sharp eye for detail and commitment to quality, she is dedicated to supporting businesses in achieving their goals.