You have incurred costs which your client will…
In the past, business owners have been heavily taxed when they had a business car which they also used for personal, but this is all changing with HMRC reducing the BIK (Benefit in Kind) taxable benefit to zero for 20/21 on new or unused emissions-free electric cars purchased after 5 April 2020. BIK tax on hybrid and non-electric cars have also been reduced.
Benefit in Kind is the amount on which you pay tax when you use a business asset privately. This would happen when you have a company car for example, that you use for business and personal. The taxable benefit (BIK) amount is calculated by applying a specified percentage to the list price of the car (note, not the purchase price, although extra features not included in the list price must be added to the list price). These percentages are based on carbon dioxide emissions from tables produced by HMRC. Another thing to note with BIK on private use of company cars is that the number of miles driven for personal use (including ordinary commuting, i.e. home to work travel) is irrelevant, however, the value of the taxable benefit may be reduced if the car is not available for part of the year (‘unavailable’ meaning you could not use the car for at least 30 consecutive days because it was undergoing extensive repairs at a garage, for example).
HMRC has reduced the BIK taxable benefit for business cars used privately to 0% for 20/21, 1% for 21/22 and 2% for 22/23 of list price (plus accessories) for qualifying new or unused electric cars purchased after 5 April 2020. In summary, how this works:
- First you calculate the BIK taxable amount by using the percentages from tables produced by HMRC and multiplying that with your car’s list price (plus accessories);
- The percentages to apply on qualifying electric cars is 0% for 20/21, 1% for 21/22 and 2% for 22/23;
- For the 20/21 tax year, the BIK taxable amount is nil, and therefore any related taxes will also be nil;
- For the 21/22 tax year, the BIK taxable amount is 1% of the car’s list price (plus accessories) – this (BIK) amount must be added to your other earnings as taxable income and it is then taxed at 20%/40%/45% depending on your overall earnings level;
- For the 22/23 tax year, the BIK taxable amount is 2% of the car’s list price (plus accessories) – this (BIK) amount must be added to your other earnings as taxable income and it is then taxed at 20%/40%/45% depending on your overall earnings level;
- You don’t pay any Employee NIC on the BIK, but your company has to pay 13.8% Employer NIC on the calculated BIK amount.
- Your company gets a deduction for Corporation Tax on the cost of the car purchase, based on CO2 emissions.
Here is an example:
Sarah is planning to buy a fully electric car in her company for £35,000 (being the list price + accessories included) during the 20/21 personal tax year. She needs a car to drive to clients, but will also be using it to drive from home to the office and some other personal trips. BIK is calculated on the value of the car, regardless of personal use. Sarah is a basic rate tax payer throughout this example.
BIK and related taxes will be the following (no employee NI is due on the BIK amount and in this example there are no periods of unavailability):
20/21: BIK taxable amount = £0 (0% x £35k) | PAYE (20% x £0) = £0 | Employer NI = £0 (13.8% x £0) | Corporation Tax saving (£35k x 19%) = £6,650
21/22: BIK taxable amount = £350 (1% x £35k) | PAYE (20% x £350) = £70 | Employer NI = £48.3 (13.8% x £350)
22/23: BIK taxable amount = £700 (2% x £35k) | PAYE (20% x £700) = £140 | Employer NI = £96.60 (13.8% x £700)
Sarah wants to sell the car after a few years when the estimated value will be £10,000 – she will have a Corporation Tax charge in the financial year in which the car is sold – £1,900 (£10,000 x 19%) will be added to her company’s Corporation Tax bill. So, she would have had a net Corporation Tax saving of £4,750 (£6,650 – £1,900).
For CO2 emissions of 1 to 50g/km, the BIK tax is based on its zero emission mileage figure, or ‘electric range’. This is the distance the car can go on electric power before its batteries need recharging. Percentages for calculating the BIK taxable amount range from 2% to 14%.
Feel free to get in touch if you have any questions or if you’d like us to calculate or check a BIK taxable amount for you, as well as tax implications for yourself and your company.
This blog is for information purposes only, and is not intended to provide tax advice – for this, you should consult an accountant.