Company Car Tax Explained

What is company car tax?

Company car tax is the income tax you pay when your employer provides a car that you are allowed to use for private journeys, including commuting. Because that private use is a perk with a real cash value, HMRC treats it as part of your earnings, which is why it is called a benefit-in-kind, often shortened to BIK. You do not hand over the value of the car, instead you pay tax on a figure that represents the yearly value of having it. The lower the car's emissions and the lower its list price, the smaller that taxable figure is, and the less tax you pay. The same idea applies to vans, although vans use a different, simpler flat value rather than the emissions-based system described here.

How company car tax is calculated

The tax is worked out in three steps. First, take the car's P11D value, which is essentially its official list price including VAT and delivery, plus most optional extras, but excluding the first registration fee and road tax. Second, multiply that value by the car's benefit-in-kind percentage, which HMRC sets according to the car's carbon dioxide emissions and, for plug-in cars, its electric range. That gives the taxable benefit, also called the BIK value. Third, you pay income tax on that benefit at your highest rate, so a basic rate taxpayer pays 20 percent of it, a higher rate taxpayer 40 percent, and an additional rate taxpayer 45 percent. So the formula is simply P11D value, multiplied by the BIK percentage, multiplied by your tax rate.

A worked example

Take a petrol car with a P11D value of £30,000 and a benefit-in-kind percentage of 30 percent. The taxable benefit is 30 percent of £30,000, which is £9,000. If you are a basic rate taxpayer paying 20 percent, your company car tax is 20 percent of £9,000, which is £1,800 for the year, or £150 a month. If you are a higher rate taxpayer paying 40 percent, the same car costs 40 percent of £9,000, which is £3,600 a year, or £300 a month. The percentage in this example is illustrative, so always check the current band for the specific car, and you can run your own figures with our company car tax calculator at /tax/company-car-tax-calculator/.

[BUILD NOTE: the 30 percent band in this example is illustrative. Do not present it as the actual current rate for any specific car. The £30,000, £9,000, £1,800, and £3,600 follow arithmetically from the example and the 20 and 40 percent income tax rates in config.]

Why electric cars are so much cheaper

The benefit-in-kind percentage is where electric cars win. Fully electric cars produce no tailpipe carbon dioxide, so they sit in the lowest BIK band by a wide margin, while petrol and diesel cars sit much higher. In practice this means the taxable benefit on an electric company car can be a small fraction of that on an equivalent petrol model, which often makes an electric car the cheapest way to be provided with a vehicle through work. The government has confirmed that the electric car percentage will rise gradually over the next few years, but it is set to remain well below the rates for petrol and diesel cars, so the advantage continues even as the gap narrows slightly.

[BUILD NOTE: confirm the current electric and low-emission BIK percentages and the published future-year increases against the HMRC company car tax rates before publish. Do not state a specific electric percentage figure unless it is taken from the confirmed HMRC table.]

Plug-in hybrids and the emissions bands

Plug-in hybrids sit between fully electric and conventional cars, and their benefit-in-kind percentage depends not only on their carbon dioxide emissions but also on how far they can travel on electric power alone. A hybrid with a longer electric-only range falls into a lower band than one with a short range, because it can do more of its driving on electricity. Conventional petrol and diesel cars are placed in bands purely by their carbon dioxide emissions, with diesel cars that do not meet a particular emissions standard paying a surcharge on top. The cleaner the car, the lower the band, which is the principle running through the whole system.

[BUILD NOTE: confirm the diesel surcharge and the plug-in hybrid range bands against the current HMRC rates at build.]

Fuel benefit, if your employer pays for private fuel

There is a second, separate charge if your employer also pays for the fuel you use on private journeys in a company car. This is called the car fuel benefit, and it is worked out by multiplying the same benefit-in-kind percentage by a fixed figure set by the government each year, then taxing the result at your income tax rate. The catch is that this charge applies in full regardless of how much private fuel you actually use, so unless you do very high private mileage, free private fuel often costs you more in tax than the fuel is worth. Many drivers are better off paying for their own private fuel and avoiding the charge entirely. Electric cars do not attract a fuel benefit charge in the same way, since electricity is not treated as a fuel for this purpose.

[BUILD NOTE: do not state the fixed fuel benefit multiplier figure unless confirmed against the current HMRC figure at build.]

How to reduce your company car tax

The single biggest lever is the car you choose. Picking a fully electric or very low emission car can cut the taxable benefit dramatically compared with a petrol or diesel model of similar value. Choosing a car with a lower list price also helps, since the benefit is a percentage of that price. If your employer offers private fuel, working out whether to decline it and pay your own can save money. Some employees are offered a choice between a company car and a cash allowance, in which case it is worth comparing the tax on each, because for a clean electric car the company car is often the better deal, while for a high emission car the cash alternative can win. Salary sacrifice schemes for electric cars can also be very tax efficient, and you can read more about how those work in our guide to salary sacrifice at /blog/salary-sacrifice-explained/.

How it affects your take-home pay

Company car tax is usually collected through your tax code rather than as a separate bill, so HMRC reduces your tax-free allowance by the value of the benefit, which means a little more tax is taken from each payslip across the year. That is why getting a company car can make your tax code change and your take-home pay fall, even though your salary has not changed. To see how your overall pay and tax fit together, our income tax calculator at /tax/income-tax-calculator/ shows how the bands apply, and our guide to tax codes at /blog/tax-codes-explained-uk/ explains the code changes you may see once a benefit is added.