Right now, savvy business owners are leasing electric cars and plug-in hybrids to take advantage of low Benefit-in-Kind (BiK) rates and saving thousands in tax.
What is Benefit-in-Kind?
Benefit-in-Kind (BiK) is a tax applied to employees and directors who receive perks or benefits beyond their salary. When your company provides you with a car that’s available for personal use, HMRC considers this a “benefit” that needs to be taxed.
In essence, BiK is a way for HMRC to tax the non-cash advantages you receive from your employment or directorship. Company cars are one of the most significant and common benefits that attract BiK tax.
How Benefit-in-Kind Works
Benefit-in-Kind for company cars operates on a percentage-based system:
- Each vehicle is assigned a BiK percentage rate based primarily on its CO2 emissions
- The lower the emissions, the lower the BiK percentage
- This percentage is then applied to the car’s P11D value (list price plus extras minus certain costs)
- The resulting amount is added to your taxable income for the year
- You pay tax on this amount at your personal income tax rate (20%, 40%, or 45%)
The revolutionary aspect is how dramatically these BiK rates vary between traditional combustion engines and electric/hybrid alternatives.
How to Calculate Your Benefit-in-Kind Rate
Calculating your company car BiK tax involves three key elements:
- Find your car’s BiK percentage rate: This is determined by:
- CO2 emissions (g/km)
- Electric range capacity (for hybrids)
- Type of fuel (diesel vehicles typically have a 4% surcharge)
- Identify your car’s P11D value:
- The manufacturer’s list price
- Plus VAT
- Plus delivery charges
- Plus any options/accessories costing over £100
- Minus any capital contributions (up to £5,000)
- Apply your personal tax rate:
- 20% for basic rate taxpayers
- 40% for higher rate taxpayers
- 45% for additional rate taxpayers
The formula is:
Annual BiK Tax = P11D Value × BiK Percentage × Your Income Tax Rate
- For example, if you’re a 40% taxpayer with an £80,000 electric car at 3% BiK:
- £80,000 × 3% × 40% = £940 annual tax cost
- This same calculation for a diesel equivalent at 37% BiK would be:
- £80,000 × 37% × 40% = £11,840 annual tax cost
The potential saving of over £11,000 per year explains why smart business owners are rapidly switching to electric and hybrid company vehicles.
Company Car Tax Bands 2025/26
The UK government has maintained exceptionally favourable BiK rates for electric and low-emission vehicles in 2025/26:
- Pure electric vehicles: Just 3% BiK rate
- Plug-in hybrids (1-50g/km CO2 with 130+ mile electric range): 3% BiK rate
- Plug-in hybrids (1-50g/km CO2 with 70-129 mile electric range): 6 BiK rate
- Traditional petrol/diesel vehicles: Up to 37% BiK rate depending on emissions
Car Tax: How Much Could You Save?
A few years ago, business owners faced a challenging situation:
- BiK rates for premium vehicles reached up to 37-38%
- This meant no VAT recovery on personal leases
- Personal credit checks were required
Times have changed dramatically. With today’s expanded range of electric and hybrid luxury vehicles, you can now:
- Lease through your business
- Reclaim 50% of the VAT on monthly payments (100% if exclusively business use)
- Benefit from ultra-low BiK rates
- Write off lease payments against your company’s profits
- Drive the premium vehicle you actually want
- The tax impact was equivalent to earning an additional £38,000 annually just for driving a £100,000 car
Making the Smart Choice: Expert Guidance
At KPPCA, we’ve helped dozens of Glasgow business owners transition to tax-efficient company car arrangements. Our approach includes:
- Comprehensive assessment of your business and personal driving needs
- Detailed tax calculations showing exact savings compared to your current situation
- Strategic timing advice to maximise tax benefits
- Financing guidance to structure the most advantageous arrangement
- Ongoing tax planning to ensure continued optimisation
What sets KPPCA apart is our ability to help with the entire process. Unlike many accountants who simply advise on tax implications, we can actually help arrange your car finance through our specialist network.
This end-to-end service ensures you not only understand the tax benefits but can actually implement the most advantageous solution for your business.
Book Your Free Company Car Tax Consultation – Our specialists will create a personalised assessment showing exactly how much you could save in 2025/26.
