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 an assumed benefit-in-kind percentage of 30 percent. The 30 percent is an assumption for this illustration, not the published percentage for any named car, and it corresponds to a petrol car around 120 grams of carbon dioxide per kilometre under the 2026/27 table. 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.

A zero-emission car is treated very differently. For 2026/27 the appropriate percentage for a car with no tailpipe carbon dioxide emissions is 4 percent, so the same £30,000 list price gives a taxable benefit of £1,200. That is £240 of tax for the year at an assumed 20 percent marginal rate, or £480 at an assumed 40 percent rate.

Both examples simplify one thing: they apply a single marginal rate to the whole benefit. In reality the benefit is added on top of your other income, so it can straddle two tax bands and be taxed partly at one rate and partly at the next. They also use the England, Wales and Northern Ireland rates, and Scottish taxpayers pay Scottish rates on this income. Check the percentage that applies to the specific car against the GOV.UK guidance on tax on company cars, and run your own figures with our company car tax calculator.

Why the electric car percentage is so much lower

The benefit-in-kind percentage is where electric cars are treated most favourably. Fully electric cars produce no tailpipe carbon dioxide, so for 2026/27 they take the 4 percent appropriate percentage, while petrol and diesel cars sit much higher depending on their emissions. On the same £30,000 list price that is a £1,200 taxable benefit for the electric car against £9,000 for a petrol car at the assumed 30 percent used above. Whether an electric car is cheaper overall for you depends on more than the benefit charge, including the list price, what the alternative costs, and the terms of any scheme your employer runs, so compare the total rather than the percentage alone. Appropriate percentages are set by HMRC and change from year to year, so check the current table on GOV.UK before committing to a car.

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 by their carbon dioxide emissions, and a diesel car can be treated less favourably than a petrol car with the same emissions depending on the emissions standard it meets. The cleaner the car, the lower the band, which is the principle running through the whole system. The exact figures, including the electric range breakpoints and the treatment of diesels, are set out in the GOV.UK company car tax guidance, which is the figure to use for a specific car.

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 important feature is that the charge does not scale with how much private fuel you actually use, so the more private mileage you do, the better value it becomes, and at low private mileage the tax can exceed the value of the fuel. Whether it is worth taking depends on your own mileage, the car's percentage and your tax rate, so it is worth doing the sum with the current multiplier from GOV.UK rather than assuming either way. Electricity is not treated as a fuel for this charge, so the car fuel benefit does not apply to a fully electric company car.

How to reduce your company car tax

The two inputs you can influence are the appropriate percentage and the list price, because the benefit is one multiplied by the other. Picking a fully electric or very low emission car cuts the percentage sharply compared with a petrol or diesel model, and choosing a car with a lower list price cuts the other side of the sum. If your employer offers private fuel, working out the fuel benefit charge against your actual private mileage tells you whether to take it. Where you are offered a choice between a company car and a cash allowance, compare the tax on each with your own figures, since which one leaves you better off depends on the car, the allowance and your marginal rate. Salary sacrifice is another route employers use for these cars, and our guide to salary sacrifice explains how that arrangement works.

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 shows how the bands apply, and our guide to tax codes explains the code changes you may see once a benefit is added.