A company car or private health plan does not pay you cash, but HMRC still puts a price on it. That price is the cash equivalent, and it is what you are actually taxed on.
When your employer hands you a perk instead of cash, a company car, private medical cover, or an interest-free loan, HMRC cannot tax thin air. So it converts the perk into a number called the cash equivalent. That number is the heart of how benefit in kind tax works, and understanding it explains every BIK line on your P11D.
There are two broad approaches. For the majority of benefits, the cash equivalent is the cost to the employer of providing the benefit, minus any amount the employee pays towards it (known as "making good"). If your employer pays £600 a year for your private dental plan and you contribute nothing, the cash equivalent is £600.
For certain high-value benefits, HMRC overrides this with a statutory formula because the simple cost would understate the real value:
Sara is a higher-rate taxpayer earning £58,000. Her employer provides private medical insurance costing £1,200 a year and a fully electric company car with a list price of £40,000.
Medical insurance: the cash equivalent is simply the employer's cost, £1,200, as Sara makes no contribution.
Electric car: the appropriate percentage for a zero-emission car in 2025/26 is 3%. The car's cash equivalent is £40,000 × 3% = £1,200.
| Benefit | Cash equivalent |
|---|---|
| Private medical insurance | £1,200 |
| Electric company car (£40,000 × 3%) | £1,200 |
| Total reported on P11D | £2,400 |
That £2,400 is added to Sara's taxable income. As a 40% taxpayer she pays £960 in tax on her benefits (£2,400 × 40%), normally collected by reducing her tax code so PAYE takes a little more each month. You can see how a high benefit total can push someone into a K tax code when benefits exceed remaining allowances.
The cash equivalent of each benefit is reported on form P11D, which your employer files with HMRC and gives you a copy of by 6 July after the tax year ends. Each benefit type sits in its own box with its own cash equivalent figure.
If your employer "payrolls" benefits instead, the cash equivalent is added to your taxable pay through payroll in real time and shows on your payslips and P60, so you would not receive a P11D for those benefits. Either way, the underlying value being taxed is the cash equivalent.
The cash equivalent is HMRC's way of turning a perk into a number; once you know how that number is built, every BIK entry on your P11D stops being a mystery.
You can legitimately lower a benefit's cash equivalent by "making good", paying your employer towards the cost. Choosing a lower-emission company car dramatically cuts the appropriate percentage and therefore the charge, which is why electric cars at 3% are so tax-efficient compared with a petrol car that could attract 30% or more. Some benefits, such as employer pension contributions and trivial benefits under £50, carry a nil cash equivalent because they are exempt.
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