Benefit in Kind on company cars: What is changing and how it might affect you amid new tax bands

With significant changes to company car tax now in place, thousands of drivers and their employers may be considering their options.

New Benefit in Kind (BIK) tax bands came into effect in January taking CO2 emissions into account for the first time.

Under the new regime, the amount taxable on vehicles as Benefit in Kind (BIK) will be determined by a company car’s original market value (OMV), the annual business kilometres driven, and new CO2 emissions-based bands.

Flat BIK rates on vans increase from 5 to 8 per cent.

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[ Tax changes for company cars threaten State’s carbon reduction efforts, leasing firms warn ]

Separately, the previous zero rate of BIK on electric vehicles worth €50,000 will be phased out. From January, it will be limited to €35,000 of OMV, then to €20,000 in 2024 and €10,000 in 2025.

EVs will be subject to BIK rates ranging from 9 to 22.5 per cent depending on mileage.

Petrol and diesel cars will see rates of up to 37.5 per cent.

The restructuring has drawn out critics so why the change? Speaking in December outgoing Minister for Finance Paschal Donohoe said the new approach was “designed to incentivise employers to provide employees with low-emission cars”.

The Government has said its policy is focused on strengthening the environmental rationale behind company car taxation. The lower the C02 emissions of a vehicle, the lower the rate of BIK it will attract.

However, it has been warned the move could actually have an inadvertent effect on the green agenda, and hinder efforts to cut transport related carbon.

Critics have warned it will have the effect of reducing the use of cleaner, modern lease cars and drive employees into less efficient petrol and diesel models. It will also increase minimum rates of tax liability for employees.

[ Ireland comes top in European electric vehicle tax survey for company cars ]

The Vehicle Leasing Association of Ireland (VLAI) has said its member companies have been “inundated” with client requests to return company cars in advance of the changes.

“The [switch to] private cars for business means these cars will not be as new, as green, as safe or as clean as the company car they are currently driving,” said Dave Kavanagh, VLAI deputy president.

The VLAI believes leasing vehicles can play a “significant role” in growing EV use but, in a submission to Government in advance of the changes, said raising BIK rates would damage this.

Mr Kavanagh said some employees could be tempted to lose their “perk” company cars, replace it with a company car allowance and move to the so-called grey fleet, typically diesel cars between four and eight years old with higher CO2 emissions.

“That goes completely against the Government’s Climate Action Plan because by definition people will buy older more polluting vehicles,” he said.

The Revenue Commissioners do not keep data on BIK as it applies to company vehicles, so the user effects of the policy shift could be difficult to assess. However, lease companies, which provide many companies with their vehicles, believe it will be a disincentive.

Other concerns have emerged. Although lower BIK rates typically apply to greater mileage, some employees entirely dependent on vehicles, such as retail, medical or pharmaceutical reps, will face higher BIK tax bills under the new band system.

One source familiar with the policy shift said while companies could technically cover a tax increase by raising pay, this is not usual and would simply shift the increase from employee to employer. Notional values on company cars also bring a PRSI cost to companies.

The minimum BIK rate under the new regulations will apply at 9 per cent, up from 6 per cent on the previous system.

“Potentially people could find themselves paying more Benefit in Kind tax than they have done before,” the source said, although adding that other tax profiles with more efficient cars could pay less.