A major review of business car benefit-in-kind taxation will be needed as a result of government plans to merge the income tax and National Insurance systems. At present, business car drivers pay BIK tax based only on their personal income tax rates of either 40% or 20% of the taxable benefit for the vehicle.
If the two systems are to merge then these tax rates will have to change or be frozen. From April this year, the individual National Insurance rate (Class 1) will be 12% – giving rise to speculation that the BIK rates could rise to 52% and 32% respectively.
The Chancellor announced consultation on the merger as part of a wide ranging plan to simplify the tax and benefits system. But he acknowledged that the process would be complex and “would take a number of years to complete”.
Commentators are pointing out that one of the major political risks with merging income tax and National Insurance is that people become more aware of the true rate of taxation.
The Chancellor announced that, from April 2012, direct taxes would be linked to the rate of inflation (CPI). However he confirmed that a number of contributions, including employer National Insurance, would be “protected”.
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