What is benefit-in-kind (BiK) tax and how does it work?

Receiving a company car or private health cover as part of your job? These are taxable ‘benefits-in-kind’, and they can affect your pay more than you might expect.

Benefit-in-kind tax, abbreviated as BiK, is a form of tax that applies to employees who receive workplace perks. The most common item referred to alongside BiK is company vehicles. While BiK tax affects many types of benefits, it initially focused on company vehicles for tax and environmental reasons.

BiK was formally introduced in 2002 to curb vehicles being excessively used by companies and to prevent companies from offering vehicles as a bonus to employees. BiK has undergone many changes since 2002, and more lie ahead, with additions to tax on electric vehicles (EVs), which were previously tax-free.

What counts under BiK?

Many non-cash benefits can count towards BiK, at the discretion of HMRC. Any goods, services or perks provided to employees outside of their salary or wages.

The UK government created BiK primarily to regulate non-salary benefits involving company cars, however, is not exclusive to company cars.

Here are some common benefits that fall under BIK:

• Company cars (for both personal and business use)
• Private medical insurance
• Gym memberships or other forms of wellness programs
• Accommodation provided by the employer
• Mobile phones, travel expenses, or work-related clothing

Consider any ‘fringe benefits’ as counting towards benefit-in-kind tax. Remember that some benefits, such as a cycle to work scheme, are tax-free and do not count towards BiK, so you should always check with your employer.

When and why was BiK introduced?

Although BiK was formally overhauled with tighter legislation in 2002 and following years, its foundations date back to 1976 in the UK tax system.

In the 1980s, company cars became increasingly popular as a workplace benefit. Early tax rules linked benefit values to the car’s list price and engine size, not to emissions or efficiency. This encouraged larger engine cars and tax avoidance, as employees could get more expensive cars written off as a business expense.

In 1994, the government recognised this loophole. A 2002 research paper from the House of Commons later revealed that after the 1994 legislation, “the value to an employee of a company car is now calculated with respect to the car’s price, rather than its engine size. The annual benefit of being given a company car is estimated as 35 per cent of the list price. This is subject to an £80,000 ceiling; cars sold in excess of this price are assumed to cost only this figure.”

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Yet there was still a key flaw: mileage wasn’t considered. The National Traffic Survey in 1999 revealed people were clocking “300 million additional business miles a year” in company cars “to take advantage of the mileage discounts”.

So, in 2002, to help protect the environment and remove the incentive to drive extensively , BiK was officially redesigned with a new structure: tax would now vary with the car’s CO2 emissions and fuel type. The lower the emissions, the lower the BiK rate, encouraging cleaner vehicles and fewer company miles.

In 2010, BiK reforms went further. “Showroom tax” was introduced, and electric vehicles (EVs) were made BiK-exempt – a move designed to reward low-emissions choices. By 2022, EVs were no longer fully exempt, but their tax rate stayed low: 2%. Rates are now set to rise incrementally by 1% per year from 2025 to 2028, followed by 2% increases until 2030, with a cap of 9%. That’s still well below the 14–35% rate for high-polluting cars.

In summary, BiK was introduced to prevent tax avoidance and reduce environmental damage, and its evolution reflects changes in behaviour, policy, and emissions goals.

How is BiK calculated?

BiK, when it comes to vehicles, is calculated based on the P11D value (the list price of the vehicle, plus VAT and any delivery charges), the CO2 emissions of the vehicle, and whether the vehicle is petrol, diesel, hybrid or electric.

Here is a three-step process for calculating your BiK.

1. Identify the P11D value (vehicle list price including VAT/delivery)
2. Apply BiK % based on CO2/emissions bracket
3. Multiply that by the employee’s income tax rate

If you’re unsure, this is the equation most people use:

P11D value x BiK percentage (based on CO2 emissions) = BiK value

Then following this, your employee tax bracket is considered:

BiK value x Income tax rate (20%, 40%, 45%) = Tax payable

Your BiK amount is then calculated from this.

Example BiK rates

For example, an employee is assigned a company vehicle worth £30,000, which is a petrol car calculated as having a 30% BiK rate, and their earnings fall within the 40% tax bracket.

The BiK value is calculated as £30,000 x 30% = £9,000. The employee is then liable for 40% of this based on their tax bracket, so the employee owes £3,600 per year (£300 per month) for using the car.

In the example of an employee using an EV, such as a £40,000 EV with a 2025 BiK rate of 2%, the BiK would be calculated as £800.

The employee would then pay £800 x 40% = £320 per year (£27 per month).

How do I avoid paying BiK on my company car?

Avoiding BiK on a company car is generally not possible; however, there are a few ways to legally minimise your tax liabilities related to car company benefits.

One of the main ways that companies reduce their tax liability is with a pool car. A pool car is a shared vehicle that is used by all members of the company and abides by certain rules:

• The car must be available for use by multiple employees.
• It cannot be used for private journeys by any employee.
• The car must be kept on business premises overnight and not taken home.
• Accurate mileage records and usage logs must be kept to prove there is no private use.

Another way to avoid BiK on a company car is to receive a car allowance instead of a company car. This way, you will pay tax on the allowance, instead of the car itself, which in some cases, may reduce your tax liabilities.

Cars used for disabilities that are used only for transport between home and work, or work-related training, are exempt from BiK.

Deliberate tax avoidance schemes can be unlawful. Always check HMRC guidance or consult a tax adviser before acting, and check Gov.uk to ensure everything is above board before filing tax returns.

Does BiK affect my personal tax-free allowance?

No, your BiK is included in your overall income.

Bear in mind that if your BiK value pushes your income up a tax bracket, you will be liable for the higher band tax rate for the portion that goes above. For example, if you are earning £45,000 per year and using a vehicle with a BiK value of £6,000, you are effectively seen as earning £51,000 per year. This means that you will pay a 40% BiK rate on some of the vehicle, instead of only 20%, even if you are still within the 20% income tax bracket.

Your personal allowance (e.g. £X) still applies, but the full BiK value is added to your income, which could push more of your earnings into a higher tax bracket.

Upcoming changes to BiK (2027)

To recap, HMRC is tightening BiK tax to close all loopholes and contribute towards protecting the environment. EVs are currently taxed at 2% at the time of writing, set to reach a maximum of 9% by 2030.

HMRC has plans to add another reform to add mandatory payrolling of BiK. This means that, instead of reporting most employee perks annually on a Form P11D, employers will need to process the tax on these benefits through payroll in real time, so tax is taken at the point when the benefit is given, just like with regular salary.

This was originally due to start from April 2026, but has recently been pushed back until April 2027.

Starting a company often means offering perks like cars or bonuses, and that means understanding how BiK works from day one. We can help you form your business and stay compliant at every step. Explore our expert company formation services and ongoing support tailored to UK businesses.