So, you’ve been told you’re getting a company car – it sounds like the best news ever. Free wheels, no hassle with insurance or maintenance – who wouldn’t want that? But… then comes the first payslip, your salary’s a LOT lower than expected, thanks to that sneaky Benefit in Kind (BIK) tax. If only someone had warned you about that tax. However, there are ways to make the company car situation work in your favour, both as an individual and as a business.
Let’s break it down with a comparison. Imagine you’re choosing between a 1.6-litre hybrid Cupra and a luxurious 3.0-litre Range Rover. On the surface, both good cars but they couldn’t be more different in reality and in terms of tax. Let’s say the Cupra has CO2 emissions of 110g/km, while the Range Rover 3.0-litre model has emissions of 210g/km. The tax you’ll pay is heavily influenced by CO2 emissions, so the Range Rover comes with a significantly higher BIK tax due to its higher emissions.
Here’s the example:
- Cupra Hybrid (1.6L):
- List Price: £25,000
- CO2 emissions: 110g/km
- BIK Tax Rate: 28%
- Annual BIK Tax Value: £25,000 x 28% = £7,000
- Taxable Income: £30,000 salary – £7,000 BIK = £23,000
- Monthly Tax: Assuming you’re taxed at the basic rate of 20%, £7,000 annual tax would mean £583.33 per month.
- Range Rover 3.0L:
- List Price: £70,000
- CO2 emissions: 210g/km
- BIK Tax Rate: 37%
- Annual BIK Tax Value: £70,000 x 37% = £25,900
- Taxable Income: £30,000 salary – £25,900 BIK = £4,100
- Monthly Tax: Assuming you’re taxed at the basic rate of 20%, £25,900 annual tax would mean £2,158.33 per month.
Monthly Tax Comparison:
- Cupra Hybrid: £583.33
- Range Rover 3.0L: £2,158.33
You can see how the Range Rover comes with a massive monthly BIK tax burden compared to the Cupra. The Range Rover costs more to run both for the individual and the business, so unless you’re aiming for a high-end car to show off, this could seriously eat into your salary.
Salary Sacrifice Example:
Let’s talk about Salary Sacrifice, which can help you make the most of your company car tax situation. In a salary sacrifice scheme, you effectively agree to a lower salary in exchange for the car (and other benefits). This reduces your taxable income, and therefore, you pay less income tax and National Insurance.
Let’s say you opt for a Salary Sacrifice Scheme for the Cupra Hybrid:
- Original Salary: £30,000
- Salary Sacrifice for Car: £5,000
- New Salary: £25,000
- BIK Tax for Cupra: £7,000 (still remains the same, as this is based on the car’s value and emissions)
Now, your new taxable income is £25,000, and the company car benefit remains the same. The Salary Sacrifice effectively lowers your taxable income, so you’re paying tax on £25,000 instead of the full £30,000. In this case:
- Taxable Income: £25,000 (after salary sacrifice)
- Tax Payable: £5,000 tax on income (20% of £25,000)
This brings your overall tax liability down by a decent amount, and if you have the salary sacrifice in place, you’re effectively paying less tax in total.
For the Range Rover 3.0L, if you were to opt for salary sacrifice, the mechanics would be the same, but with a much higher BIK tax:
- Original Salary: £30,000
- Salary Sacrifice for Car: £8,000
- New Salary: £22,000
- BIK Tax for Range Rover: £25,900 remains the same
While the sacrifice scheme still lowers your salary and tax liability, the Range Rover is just going to cost you more, both in terms of BIK tax and overall salary sacrifice. In this case, you’ll see a big chunk of your salary going to the BIK tax, even with salary sacrifice.
Summary of Monthly Tax:
- Cupra Hybrid: Without Salary Sacrifice: £583.33 / With Salary Sacrifice: £400 (estimated)
- Range Rover 3.0L: Without Salary Sacrifice: £2,158.33 / With Salary Sacrifice: £1,250 (estimated)
- Tesla Model 3: Without Salary Sacrifice: £50 / With Salary Sacrifice: £30 (estimated)
As you can see, salary sacrifice can help reduce your monthly tax payment, but the Range Rover is still a tax-heavy choice. Choosing a car like the Cupra Hybrid is far more tax-efficient, even with salary sacrifice, because of its lower emissions and lower BIK rate. Then adding the Tesla in for comparison – you can see why people opt for them as company cars!
At the end of the day, whether you’re the one driving or offering the cars, it’s all about finding the best deal. Just make sure you do your homework because when it comes to company cars, those tax bills can quickly take the shine of that new shiny motor.
