One of the most popular benefit in kind (BIK) options available is to provide an employee with a car and fuel. However, before you decide to go ahead and reward your employee with this benefit, there are a few factors that should be taken into consideration, as the benefit will involve a cost tothe employee, as well as the employer.
Income tax and National insurance
One of the benefits for the employee of having a car, as opposed to a simple salary addition, is that there will not be any National Insurance Contribution (NIC) Class 1 Primary payable on this benefit in kind, effectively saving them either 12% as a basic rate taxpayer or 2% as a higher and additional rate taxpayer. Any income tax affected by this benefit is payable by an employee either via a Self-Assessment return or most likely, via their tax code.
An employer will need to file a P11D form. This is due to be submitted by the 6thJuly of the following year that the benefit in kind was applied. In addition,the employer will have to pay National insurance Class 1A at 13.8%. This is effectively equal to NIC class 1 secondary that they would have to pay if they had just provided an equivalent bonus to an employee. Therefore, as it stands, there are no benefits to an employer when using this option.
How BIK is calculated
BIK is calculated using the list price of the car when it isfirst registered multiplied by a percentage rate that is determined by thecar’s CO2 emission levels. Because of this percentage calculation that is dependent upon the CO2 emission levels, this is often not the price actually paid by the employer for the car. The lower the emission the lower the BIK willbe. As well as choosing a lower rate emission car, an employee can lower the BIK further by contributing towards the purchase of the car to a maximum of £5000. Also, If the car was not used forthe whole year then the benefit will also be reduced accordingly.
See the link below for the relevant table for the tax yearin consideration.
As we can see from the HMRC table, the most beneficial car tohave is an electric car with a BIK percentage of only 1% of the list price of the car. Therefore, let us say that we buy a Tesla for £100K. The percentage calculation is £100,000 x 1%=£1K and the 13.8% NIC class 1A calculation is £138.The employer will only have to pay £138 whilst the employee will pay £1000 x40%= £400 (assuming they are a higher rate taxpayer).
Fuel benefit is fixed at £24,600 for the year 2021/2022 but this increases to £25,300 for the year 2022/2023, multiplied by a percentage applicable for the appropriate CO2 emission.
To avoid a fuel charge an employee can choose to reimburse their personal mileage at advisory rates, which again depends on the engine size ofthe car and fuel type. https://www.gov.uk/guidance/advisory-fuel-rates.
Whether a personal reimbursement would be the mostbeneficial way to handle the fuel charge would depend on how many personalmiles an employee does throughout the tax year and the engine size of the car, as well as the fuel type that they use. Once these are known, a simple calculation can be performed to determine the best way forward.
Employers are required to complete a P11D form relating to the car and pay NIC class 1A at 13.8%.
Many employers forget that after they have provided the BIK,they will need to complete a P46 form to notify HMRC. The deadline will depend on when the car was first available for use by the employee. Guidance on notifying HMRC can be found at https://www.gov.uk/tell-hmrc-company-car
Car rental will simply be treated as allowable expenditure for corporation tax purposes.
However, if a car is going to be purchased then careful consideration should be taken. Normally, it is possible to reduce corporation tax by claiming first year allowances. Consideration should be given to the CO2 emissions of the car. Any expenditure taking place before 1 April 2025 for newcars with CO2 emissions of no more than 50g/km (0g/km for expenditure incurredon or after 1 April 2021) is eligible for a 100% first-year allowance (FYA). For cars with emission CO2 emissions between 51g/km and 110g/km a writing-down allowance (WDA) at 18% applies and above 110g/km (50g/km for expenditure incurred on or after 1 April 2021) a WDA at 6% is applicable.
As it stands, the most beneficial car for income tax, national insurance and corporation tax is a fully electric car!
If you have any further questions, please do not hesitate to contact us for further information.