Company Car Tax Explained: How Benefit-in-Kind Rates Work

Company car tax is the Income Tax you pay on a car your employer provides for private use, including commuting. The amount you pay depends mainly on the car’s list price, CO2 emissions, fuel type, and your Income Tax rate.

The difference between cars can be substantial, so checking the Benefit-in-Kind (BIK) rate before choosing a company car can save you hundreds or even thousands of pounds in tax each year.

Here’s how company car tax works, how to calculate it, and what the latest BIK rates mean for you.

Key points

• Electric cars still have a major BIK advantage ⚡
  Electric cars have a 4% BIK rate in 2026/27, while rates for higher-emission petrol and diesel cars can reach 37%. However, electric car BIK rates are scheduled to rise over the coming years.
• Private fuel can create a separate tax bill ⛽
  If your employer pays for private petrol or diesel, you may have to pay a separate fuel benefit charge. HMRC calculates this using its £29,200 fuel benefit multiplier for 2026/27.
• Some payments can reduce your taxable benefit 💷
  Qualifying capital contributions and payments you make towards private use can reduce your company car tax, while salary sacrifice can change how you pay for the vehicle. The rules and potential savings differ, so it’s a good idea to review the details of your arrangement.
• ANNA can simplify the admin that comes with a company car 🚀
  With ANNA, you can keep vehicle expenses, receipts, and business transactions organised in one place. ANNA’s Auto Accountant, a dedicated UK business account, and real-time tax estimates can help you stay on top of your business finances.

How company car tax is calculated

Company car tax comes down to three numbers: the car’s P11D value, its BIK percentage, and your Income Tax rate.

The P11D value is the manufacturer’s list price, including VAT, delivery charges, and factory-fitted extras, but excluding the first registration fee and Vehicle Excise Duty.

It doesn’t matter what your employer paid for the car or what discount was negotiated. HMRC uses the list price when the car was new, and that figure stays fixed.

As for the BIK percentage, HMRC bases it on the car’s CO2 emissions and fuel type.

The basic tax calculation is:

P11D value × BIK percentage = taxable benefit

You then multiply the taxable benefit by your Income Tax rate:

Taxable benefit × Income Tax rate = company car tax

For example, a £30,000 car with a 30% BIK rate has a taxable benefit of £9,000. A higher rate taxpayer paying 40% Income Tax would therefore pay £3,600 in company car tax for the year.

If you only have the car for part of the tax year, the benefit is adjusted according to the number of days it was available to you.

🧠 Good to know

Most people don’t see the full taxable benefit added directly to their pay. Your employer will usually adjust your tax code or payroll deductions so you pay the extra Income Tax through PAYE.

Company car BIK rates for 2026/27

For the 2026/27 tax year, running from 6 April 2026 to 5 April 2027, the key rates are:

Petrol and diesel cars sit on a sliding scale based on CO2 emissions, with higher-emission vehicles attracting higher BIK rates.

Plug-in hybrids are also assessed according to their electric range. A PHEV with a longer electric range receives a lower BIK rate than one with a shorter range.

Electric car BIK rates

Electric cars have some of the lowest company car BIK rates, but the rate is gradually increasing.

For 2026/27, the BIK rate for an electric car is 4% of its list price. This increases to 5% in 2027/28, and will rise further in the following years under the published schedule.

If you’re choosing a company car, don’t look only at the first-year rate. Consider how the BIK rate will change over the period you expect to keep the car, as this can affect the overall tax cost.

Diesel cars and the RDE2 surcharge

Diesel cars that don’t meet the Real Driving Emissions Step 2 (RDE2) standard attract an additional 4% BIK surcharge, although the overall rate remains capped at 37%.

Most newer diesel cars meet the RDE2 standard, but it’s best to check the specific vehicle.

For diesel plug-in hybrids, the 4% diesel surcharge doesn’t apply because they’re treated as alternative fuel vehicles for these purposes.

How to reduce your company car tax

Choosing a lower-emission vehicle is the best way to reduce your BIK bill, but there are other options.

Capital contributions

If you pay towards the purchase price of your company car when you first receive it, you can reduce the car’s value, which is used to calculate your taxable benefit. The reduction is capped at £5,000.

For example, if you make a qualifying £5,000 contribution towards a £35,000 car, the BIK calculation can be based on £30,000 rather than £35,000.

A capital contribution is a payment towards the cost of the car itself. It’s different from payments you make for private use of the vehicle, which are treated separately.

Payments for private use

If you pay your employer for the private use of a company car, those payments can reduce the taxable benefit you report on the car. The payment has to be made for private use of the vehicle and meet HMRC’s conditions to qualify.

For example, if the taxable benefit for your company car is £4,000 and you make £1,000 of qualifying payments for private use, the taxable benefit can be reduced to £3,000.

These payments are different from a capital contribution towards the cost of the car. A capital contribution can reduce the car’s value for BIK purposes, while a private-use payment reduces the taxable benefit itself.

Salary sacrifice

A salary sacrifice car scheme allows you to give up part of your gross salary in return for a company car. You and your employer agree on the amount you sacrifice, and it’s deducted from your salary before Income Tax and employee National Insurance are calculated.

You still pay BIK tax on the company car based on its taxable value and the applicable BIK percentage.

This applies to cars emitting 75g/km or less, including all electric cars. For cars above that threshold, you’re taxed on the salary you gave up or the BIK value, whichever is higher, so the saving largely disappears.

For electric cars, the low BIK rates can make salary sacrifice particularly tax-efficient compared with taking the same amount of salary and paying for a car privately.

The overall cost also depends on the lease cost and your employer’s scheme terms. Some schemes also include costs such as insurance, servicing, and maintenance, so check what is included before comparing the options.

The company car fuel benefit charge

If your employer provides you with a company car and also pays for fuel you use for private journeys, you may have to pay tax on two separate benefits.

The first is the company car benefit, which is based on the car’s P11D value and BIK percentage. The second is the fuel benefit charge, which applies when your employer provides private fuel.

For 2026/27, HMRC’s fuel benefit multiplier is £29,200. You calculate the taxable fuel benefit by multiplying this figure by the car’s BIK percentage:

£29,200 × BIK percentage = taxable fuel benefit

For example, if your car has a 30% BIK rate:

£29,200 × 30% = £8,760 taxable fuel benefit

If you’re a higher rate taxpayer paying 40% Income Tax, the fuel benefit would therefore cost you:

£8,760 × 40% = £3,504 in Income Tax

The charge is based on the fixed multiplier, not on the amount of private fuel you use. If you repay your employer for all the private fuel they provide, you can avoid the fuel benefit charge.

How company car tax is reported and collected

Company car and other taxable benefits have traditionally been reported to HMRC using form P11D after the end of the tax year. Employers also use P11D(b) to report the Class 1A National Insurance they owe on taxable benefits.

Some employers already payroll benefits, meaning the taxable value is added to your taxable pay throughout the year instead of being dealt with through a later tax code adjustment.

HMRC is changing this system. From April 2027, payrolling of company cars, vans, fuel benefits, and medical benefits will become mandatory, with most other benefits following later.

Until then, your employer may use either the P11D or payroll method. If you’re unsure how your company car benefit is being taxed, ask your employer or payroll team.

Company van tax

Company vans have their own BIK rules, which are simpler than the rules for company cars. Instead of calculating the taxable benefit as a percentage of the van’s list price, HMRC sets a fixed annual van benefit charge.

Did you know?

For 2026/27, the standard van benefit charge is £4,170. However, it’s nil for zero-emission vans, no matter how much you use one privately.

If you’re given a van for private use, HMRC uses this amount to calculate your taxable benefit. Your actual Income Tax bill then depends on your tax rate.

For example, if you’re a higher rate taxpayer paying 40% Income Tax:

£4,170 × 40% = £1,668 tax a year

A separate van fuel benefit charge can apply if your employer also provides fuel for private journeys.

There is no taxable benefit if you use the van only for business journeys and ordinary commute, and any other private use is insignificant. Anything more than the occasional minor detour counts as private use, and the van benefit charge applies.

Double cab pickups

Double cab pickups can be taxed as either vans or cars, depending on when they were ordered or leased.

Double cab pickups ordered, leased, or made available before 6 April 2025 can continue to be treated as vans under transitional rules until the earlier of disposal, lease expiry, or 5 April 2029.

If your business uses a double cab pickup, check whether it falls under the car or van rules before estimating the BIK tax, as the difference can be significant.

ANNA makes it easier to manage your company car costs

A company car comes with year-round paperwork: fuel receipts, servicing invoices, and P11D or payroll figures.

ANNA keeps all of that in one place alongside your other business admin, so when HMRC or your accountant asks for the numbers, you’re not digging through the glovebox.

Here’s how it helps:

• Automatic bookkeeping: Keep business transactions categorised and up to date without manually recording every payment
• Receipt capture: Photograph and store receipts for fuel, servicing, repairs, and other business expenses, so you have a clear record when you need it
• Business account: Use a dedicated UK business account to keep company vehicle costs separate from your personal spending
• Self Assessment filing: Prepare and file your Self Assessment tax return with HMRC, and stay on top of your personal tax obligations
• Corporation Tax filing: Prepare and file your Corporation Tax return with HMRC and keep your company’s tax reporting organised
• Smart reminders: Get reminders about key business and tax deadlines
• Real-time tax estimates: Keep track of your wider tax position while you manage your business finances
• Expense tracking: Monitor all company car and business-related spending in one place for clearer financial visibility
• Invoice management: Create, send, and track invoices, and see at a glance which ones are still unpaid
• 24/7 support: Message ANNA’s UK-based support team whenever you have tax-related questions

Try ANNA today and stay on top of your company car admin.