How to Choose a Business Lease That Minimises Your BiK Tax Exposure

Finding ways to reduce outgoings, economise, and minimise tax exposure has perhaps never mattered more for businesses than it does right now.

Changes in business rates and continual increases in everything from utilities to supplier fees mean that being lean and agile in terms of finances is of paramount importance. The same is true for individual households, with many employees facing similar issues that stem from rising prices and economic uncertainty.

To get to the bottom of this issue, we’re going to take a look at how to choose a business lease for a vehicle that will minimise your tax exposure.

What is a Benefit in Kind?

Benefit in Kind (BiK) is a tax an employee has to pay on a car or other type of vehicle that they are given by their employer. This is one of the so-called ‘hidden charges’ associated with a company car and is something that requires careful consideration at the very beginning. While many companies will already have a standard business lease in place as part of their financing setup, it never hurts to understand how it all works.

How BiK is calculated?

The total amount you will pay is determined by the size of your salary and the overall value of the vehicle. If you pay 20% income tax, you will pay 20% of the list price of the car (sometimes referred to as the P11D value). And if you are in the 40% tax bracket, you will pay 40% of the car’s list price. This amount is referred to as the BiK tax and you are legally obligated to pay it.

All of this can sound a little complicated, so let’s take a step back and introduce the concept of a business lease.

What is a lease in car financing?

You can buy a car outright by meeting the sticker price you see on the forecourt, or you can lease it from a car leasing company. This is where you pay a far smaller initial amount than if you were purchasing it outright, followed by a fixed set of monthly payments for the duration of the leasing agreement.

Agreements typically run from 2-5 years and are an increasingly popular option with both businesses and employees because they fix the price of the car for the duration. That said, you will want to reduce the cost as much as you can.

Can you avoid paying BiK on a company car?

If your employer is offering a business lease as a means to get a company car, you will have to pay the associated BiK. An alternative option will be to take a car allowance from the business — with their agreement, of course — in the form of an increased salary. You would then pay the salary increase towards the car and pay PAYE tax on your newly adjusted salary.

While this gets around the issue of BiK, it’s important to note that the lease will then be in your name and not that of the company. You will, however, be able to claim business fuel expenses so there is plenty to think about. If you prefer to keep things simple and stick with a business lease, there are ways you can reduce the BiK on a company car.

How to reduce BiK on a company car

One of the ways in which businesses can lower the BiK on their company cars is to ask for a contribution from the employee towards the initial payment. While this can reduce the taxable benefit, it does mean that a new employee is being asked to do something they may not be familiar with. Focusing on the specific choice of vehicle is a much better option.

Hybrid vehicles are powered by a proven combination of fuel and electric power, allowing them to have significantly lower emissions than traditional petrol or diesel models. The government is actively pushing the widespread adoption of hybrid vehicles, as well as EVs, and is now offering a range of tax savings.

Exploring options such as a Range Rover Hybrid Lease will allow you to access these savings, with the total amount determined by two key things. Firstly, the total CO2 emissions will play a major role in the final amount, and secondly, the range when powered only by the electric part of the vehicle will also be considered. Connecting with a hybrid vehicle leasing specialist will allow you to understand your options and see the savings without delay.

Reducing BiK with pool cars

You can also reduce the BiK by keeping the car as part of a pool where it is owned by the business and then loaned out to approved employees. Because they will only have access to the pool car during business hours, and for business purposes, you can reduce the BiK rate and pay a lower amount of tax.

Final thoughts

The best way to lower BiK is to connect with a professional who can guide you through your hybrid vehicle leasing options. Not only will you be saving money, but you’ll also be improving your brand image by doing your bit to help save the planet.