How BiK affects your tax code
The mechanic is simple: HMRC subtracts the BiK's cash-equivalent value from your personal allowance.
| Standard code | BiK value | New code | Allowance |
|---|---|---|---|
| 1257L | £0 | 1257L | £12,570 |
| 1257L | £1,000 | 1157L | £11,570 |
| 1257L | £3,000 | 957L | £9,570 |
| 1257L | £5,000 | 757L | £7,570 |
| 1257L | £10,000 | 257L | £2,570 |
| 1257L | £15,000 | K243 | -£2,430 (K code) |
The tax cost is the BiK value × your marginal Income Tax rate: - Basic rate (20%): £200 extra tax per £1,000 of BiK - Higher rate (40%): £400 per £1,000 - Additional rate (45%): £450 per £1,000
Plus 60% effective in the £100,000–£125,140 allowance taper band.
Worked example — company car
A £40,000 list-price car with 25% taxable percentage (mid-CO2): - Cash-equivalent value: £40,000 × 25% = £10,000
For a £50,000 earner (higher rate band starts at £50,270): - Allowance reduced by £10,000 → 257L - Taxable income increases by £10,000 - All in basic rate slice → £2,000 extra tax/year - Plus you have the car
The decision of whether the company car is worth it depends on: - Cash equivalent (the taxable amount) - Vs. the cost of buying/leasing privately
For low-CO2 cars (electric), the taxable percentage is much lower (2% in 2026/27 for full BEV); a £40k EV is taxed on £800/year = £160-£360 cost depending on band.
Worked example — private medical insurance
Family private medical insurance with £1,500 employer-paid premium: - BiK value: £1,500 - Tax cost: £1,500 × marginal rate - Basic rate: £300/year - Higher rate: £600/year
For most workers, private medical is a reasonable BiK — visible cost on the payslip, comparable to the public-market price for an equivalent policy.
Worked example — beneficial loan
Employer interest-free loan of £20,000: - HMRC official rate of interest: ~2.25% (2026/27 — varies) - Annual benefit value: £20,000 × 2.25% = £450 - Tax cost: £450 × marginal rate
Beneficial loans are tax-efficient if structured right — small BiK relative to the loan principal.
When BiK creates a K code
If BiK exceeds your personal allowance, the result is a K-prefix code:
Example: £18,000 of BiK on standard 1257L: - Personal allowance: £12,570 - BiK reduction: £18,000 - Net: −£5,430 - K-code: K543 (the negative figure / 10, with K prefix)
K codes add taxable income to your earnings rather than removing allowance. HMRC's 50% rule means K-code deductions can't exceed 50% of your gross pay in any pay period; excess carries forward.
How BiK affects payslip
You don't pay tax directly on the BiK — it adjusts your tax code, and the extra tax comes out of your ordinary salary's PAYE.
Example: salary £45,000, BiK £4,000, code 857L (reduced from 1257L): - Allowance: £8,570 - Taxable salary: £36,430 - Income Tax: £36,430 × 20% = £7,286 (vs £6,486 without BiK) - Extra tax due to BiK: £800
You still receive your £45,000 gross. The tax deduction is just higher than it would be without the BiK. Net pay drops by ~£800/year.
What's typically a BiK
| Benefit | BiK value (typical) |
|---|---|
| Company car | List price × CO2% × usage time |
| Private medical | Employer's premium paid |
| Healthcare cash plan | Employer's premium paid |
| Living accommodation | Annual rental value − any rent paid |
| Beneficial loan | (Official rate × balance) − interest you paid |
| Gym membership | Employer's cost |
| Childcare vouchers (legacy schemes) | Voucher value |
| Mobile phone (personal use) | Pro-rata employer cost |
| Other | Per HMRC's published rules |
Some perks are exempt (one annual party up to £150/head, trivial benefits up to £50, in-house leisure facilities) and don't appear on a P11D.
When BiK ends — updating HMRC
Returned company car, cancelled private medical, etc.
The flow: 1. Your benefit ends (say, 31 March) 2. Your employer's payroll/HR removes the benefit from records 3. The P11D for that tax year reflects the partial-year benefit value 4. HMRC processes P11D after July 5. Your new code from October ish reflects the change
This timeline means there's typically a 6-12 month lag between a benefit ending and your tax code reflecting it correctly.
To expedite: log into HMRC Personal Tax Account and update the benefit end date directly. HMRC re-issues the code within 2-6 weeks.
Salary sacrifice and BiK
Salary sacrifice arrangements can convert salary into BiK with specific tax advantages — but the 2017 changes mean most sacrifice schemes (gym, mobile, etc.) now retain the salary equivalent for tax purposes.
Surviving sacrifice arrangements that still save tax: - Pension contributions (the big one) - Cycle-to-work schemes (under £1,000) - Ultra-low-emission cars (BEVs) - Childcare schemes registered pre-2017
These work because the BiK rules don't apply or favour them.
Practical checklist
- Review your P2 Notice of Coding — see each BiK and its value
- Cross-check against your actual benefits — do the values match HMRC's record?
- Verify on Personal Tax Account — same data, easier to update
- If a benefit has ended, update HMRC to avoid continuing to pay tax on it
- For new benefits, expect your code to change at the next P11D processing (summer)
- K-code situations: see the K code guide →
In short
Benefits in kind reduce your tax code's allowance by their cash-equivalent value. £4,000 BiK on 1257L gives 857L. Tax cost is BiK value × your marginal rate. Annual P11D submissions drive HMRC's BiK record. Most code changes around July-October are P11D-driven. For broader context see tax codes hub → and P2 Notice of Coding →.