BIK rates and company car tax
Company car tax rules have been designed to encourage employers and company car drivers to choose cars with lower levels of CO2 emissions; incentives are offered both to the company and to the recipient of the vehicle to select low emission vehicles.
Under the current system, company and employee company car tax are both based on a percentage of the official price of the car (called the 'P11D'), the percentage being primarily determined by the car's CO2 emissions. For the employee, the Benefit-in-Kind (BIK) is then taxed at the appropriate personal tax rate - usually collected through PAYE.
Company car tax payable by an employee is based on the vehicle's P11D value multiplied by the appropriate BIK rate (determined by the car's CO2 and fuel type) and the employee's income tax rate (basic rate of 20%, higher rate of 40% or additional rate of 45%).
Company car BIK rates 2017 - 2021
The rates shown are for April 2017 to March 2021 as confirmed in Budget 2017.
Company car BIK rates for the financial year 2017/18 start at 17% for conventional petrol and 20% for diesel vehicles, the rate generally increasing in 1% increments as CO2 bands rise, up to a maximum of 37%. In 2017/18, the rates for diesel vehicles are 3% higher than those for petrol equivalents; this is to take into account the greater emissions of local pollutants such as NOx. From financial year 2018/19, the diesel supplement will increase from 3% to 4% over petrol powered cars.
All hybrid company cars also receive a reduced BIK rate as a result of their lower CO2 emissions, which tends to reduce their BIK rates by at least 2%, and often more. Note that for diesel hybrid powered cars, the diesel surcharge does not apply, since they are not classed as diesel-powered cars, but alternatively fuelled vehicles.
Ultra Low Carbon Vehicles (ULEVs) are rewarded with lower BIK rates – from April 2017, plug-in hybrids are rated at 13% or 17% (depending on official CO2 emissions), and battery electric cars are rated at 9%. For financial year 2018/19, those rates increase to 16%, 19% and 13% for plug-in hybrids and pure-electric cars respectively, before a 3% increase for each of the three bands comes into effect in 2019/20.
From April 2020, new BIK rate bands will be introduced, offering greater incentives for the greenest cars, the new bands depending on both CO2 emissions and electric driving range. BIK rates for zero-tailpipe emission models will drop to just 2%, with models emitting between 1-50 g/km CO2 having rates between 2% and 14% - depending on the electric range in miles. Those with a range in excess of 130 miles are classed as pure-electric models for the purposes of BIK ratings, while those plug-in models with a range of less than 30 miles will be rated at 14%.
The table below shows how the percentage BIK rates vary with vehicle CO2. The table represents petrol, diesel and electric related BIK rates for this and the current financial year, and the next three tax years (2018-2021).
For vehicles registered before 1st January 1998, there is no reliable source of CO2 emissions data. If such vehicles are used as company cars, they are taxed according to engine size: Up to 1,400cc, BIK 15%; 1,401-2,000cc, BIK 22%; Over 2,000cc, BIK 32%.
Source: HMRC Overview of Tax Legislation and Rates Nov 2017. Notes: For cars registered since 1998. For diesel hybrid powered cars, the 3% diesel surcharge does not apply. For HMRC purposes, Fuel Type E is for zero-emission cars (including those which run on electricity only), Fuel Type D is for all diesel cars, and Fuel Type A is for all other cars.
4% diesel supplement 2017 - 2021
As of financial year 2017/18, HM Treasury currently levies a 3% diesel supplement over petrol powered models to account for greater levels of tailpipe pollutants other than CO2. It also increases revenue since diesel models remain popular with business users, and make up a large proportion of the market.
Being primarily CO2-based, the system of company car tax historically has contributed to a significant increase in the number of diesel cars in the UK – a little under half of UK new cars are now diesels, compared to only around 20% 10-15 years ago.
However, with so many air quality related issues related to diesel cars having been reported in the news over the past couple of years, diesel market share is dropping, with petrol, hybrid, and electric vehicles taking some sales from diesel.
For these reasons, from April 2018, the diesel supplement will therefore increase from 3% to 4%. Combined with the added encouragement for company car users to pick ULEVS - with BIK rates as low as 2% from 2020/21 - the widening financial factors are likely to get more drivers into plug-in models.