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How to calculate benefit in kind - BIK

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Having a company car comes with lots of exciting choices such as what model, manufacturer and style to name a few of them. The much more confusing side of company cars is how to work out how much tax you will pay for the pleasure of having one. Here at Red Kite Leasing, we have put together a quick guide on how to calculate how much tax you will pay each month on your chosen company vehicle.

What is benefit in kind or BIK?

Benefit in kind is a way for the government to tax you on recieving a company benefit that you have not personally financially contributed to the cost of. This way, the government is not missing out on tax revenue from a potential purchase you may have made privately should you not have had the benefit. For examply, if you didn't have access to a company car, you most likely would have bought one privately and paid an amount of tax with that purchase.

All clear so far? Excellent. Next we need to know...

What affects my benefit in kind?

There are three factors that affect how much benefit in kind you pay. They are, the P11D value of the car, the amount of CO2 emmissions from the car and your rate of personal income tax.

We'll start with the P11D value of the car. This is calculated by taking the recommended retail price of the car and subtracting the 1st year registation fee and first years road tax. Any discounts that may have been applied to the car do not apply for the sake of calculating P11D value.

CO2 emmissions are put in to a table, which i have displayed below, and fall in to bandings. Once you have found out the level of CO2 emmitted from your vehicle you can see what banding it falls in to and then cross reference that with the tax year you are currently in. This will then give you a percentage, please be aware that diesel engines currently receive an additional 4% over the levels displayed.

The third item on our list is your personal income tax rate. This is related to whether you are a 20%, 40% or 45% income tax payer.

Now that we know what affects benefit in kind we can discover...

How is benefit in kind calculated?

As previously mentioned, there are three factors that affect how benefit in kind is calculated. Here is a scenario where i can work out the benefit in kind on a Volkswagen Golf applying those three factors.

I'm interested in a new Volkswagen Golf GT 1.5 TSI EVO with DSG gearbox and metallic paint. The total cost of this car is £27,095, but that includes the first year registration fee (£55) and road tax (£165). Subtracting those, i have a P11D value of £26,875.

The CO2 emmissions on this car are 119g/km and it is petrol. The tax year is 2018/19, so looking on the table the percentage applied to this car is 24%.

Lastly, i am a 20% income tax rate payer.

To work out the monthly benefit in kind we now use this equation:

(P11D x CO2% x income tax rate) ÷ 12 months

So now our example looks like this:

(£26,875 x 24% x 20%) ÷ 12 months = £107.50 per month

To use the same example but this time with a personal income tax rate of 40% it would look like this:

(£26,875 x 24% x 40%) ÷ 12 months = £215 per month

It's easy when you know how.

How to lower my benefit in kind?

You have probably worked it out already but there are two clear ways to reduce your benefit in kind. If you are lucky enough to be a 40% or more, personal income tax payer then you are clearly not going to reduce your income to save a lesser amount of tax. So the best ways to reduce your benefit in kind are to:

Drive a vehicle with lower CO2 emmissions

Every year, cars become more and more efficient. We are now at a critical point where electric cars are due to take off on a major scale with the infrastructure to support them and the battery range on the cars becoming better each year. If you aren't quite ready to jump completely in to plug in electric cars yet, there are a huge choice of low emmission petrol engines or self charging hybrids on the market.

Drive a vehicle with a lower P11D value

As technology regarding efficiency and lower emmissions develops, so does the quality of vehicles on the market. You no longer need to pay top prices for quality cars. In the age of the internet, reviews can make or break a business and as a result all of the poor competition has either withdrawn from the market or developed in to a fantastic product.

Here at Red Kite Leasing with have taken the time to compile the best business contract hire and personal contract hire offers in the country. You can see all of our business and personal contract hire offers from our homepage.

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Posted on 7th March 2019 at 7:08 AM

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