Company Car Tax – What It Is and How It Works

A simple guide to Benefit-in-Kind tax, how it’s calculated, and how you can save with a tax-efficient company car.

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What is company car tax? How to calculate your BIK Example of BIK amounts Current BIK figures Tips to keep it low FAQs

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Company Car Tax Explained

Company cars are a popular employee benefit in the UK, offering convenience and potential savings on personal car expenses. However, they also come with considerable tax implications that employers and employees must be aware of. Known as a Benefit-in-Kind (BiK) tax, this tax is payable when a company car is used for private purposes, such as commuting. The amount of tax to pay depends on the car's CO₂ emissions, its list price, and your income tax band. This guide covers all you need to know about company car tax, so you can make sound decisions that weigh benefits against costs, whether you are an employer managing a fleet or an employee selecting your next vehicle.

So, What is Company Car Tax?

Car tax for company cars, or Benefit-in-Kind (BiK) tax, is applied when an employee is provided with a car to use privately, including to and from work. You are taxed on:
P11D Value: The car's list price (including VAT and delivery), or list price with accessories.
CO₂ Emissions: The car's CO₂ emissions have a direct impact on the BiK percentage rate.
Fuel Type: Petrol, diesel, hybrid, or electric cars all affect your BiK rate.
Electric Range: For plug-in hybrids, a longer electric-only range typically means a lower BiK rate.
The BiK percentage is then multiplied by the P11D value to determine the BiK value, charged at your income tax rate (20%, 40%, or 45%).

How to Calculate Company Car Tax

If you have recently started new employment with a company car, or had a promotion that now allows for a car, it can be quite confusing to work out the tax you will pay on different vehicles, assuming you have a choice in car! So how do you work out how much tax you will pay?

Find the P11D Value: Add VAT, delivery fees, and optional items.
Discover the BiK Percentage: Depending on fuel type, car CO₂ emission, and electric range.
Find the BiK Value: P11D value x BiK percentage.
Put in Your Tax Rate: BiK value x your income tax rate.
Example: On a car with a P11D value of £30,000 and a BiK rate of 25%:
BiK Value = £30,000 x 25% = £7,500
Annual Tax (at 20%) = £7,500 x 20% = £1,500
*For precise figures, use the HMRC's Company Car and Fuel Benefit Calculator.

Factors Affecting Company Car Tax

When it comes to company car tax, a few key factors can make a big difference to what ends up in your take-home pay, or out of it! First up, CO₂ emissions: the cleaner your car, the kinder the taxman. Low-emission vehicles attract lower tax rates, making them a savvy choice if you’re looking to save. Fuel type matters too, with electric vehicles (EVs) leading the way in tax-friendly perks. Choose an EV and you’ll benefit from seriously reduced Benefit-in-Kind (BiK) rates compared to petrol or diesel models. If you’re driving a plug-in hybrid, the longer your car can run on electric power alone, the less you’ll pay in tax, so range really does matter! Showy extras like top-range wheels or a sunroof spanning the width of the roof might make envious stares from passersby, but they'll also add to the P11D price of your car, and more tax follows. And although Road Tax isn't counted as part of the BiK calculation, it's still something to take into account when budgeting your finances. Bottom line? Make your decision smart, make it green, and you could have a new car and a lower tax bill.

Electric Vehicles and Company Car Tax

Electric vehicles (EVs) are gaining popularity due to environmental concerns and tax incentives. Here are some facts you need to know:
BiK rate for electric cars is 3%, rising to 9% in 2029.
With zero tailpipe emissions, EVs have the lowest BiK percentages.
Reduced BiK will result in significant savings on car tax and reduced National Insurance employer contributions.

Fuel Benefit Charge

Here’s where things get a little more fuel-ish. If your employer covers the cost of fuel for personal journeys, even that quick trip to the shops or a weekend getaway, you’ll face an extra Benefit-in-Kind (BiK) tax charge. That’s right, free fuel isn’t quite as free as it sounds! The tax is calculated using a fixed multiplier (which is £27,800 for the 2025/26 tax year) multiplied by your car’s BiK percentage. So, let’s say your car has a BiK rate of 25%. That gives you a fuel benefit value of £6,950. If you’re a basic-rate taxpayer (20%), you’d owe £1,390 in tax just for the perk of that “free” fuel.

But here’s the good news. You can dodge this charge entirely. Just reimburse your employer for any personal fuel you use, and the taxman won’t bat an eyelid. So, unless your employer is fuelling a road trip to the moon, it’s often cheaper (and smarter) to pay for your own petrol when you’re off the clock.

Company Car vs. Car Allowance

When it comes to getting behind the wheel through work, employees are usually given two options: take a company car or opt for a car allowance. So, what’s the difference and which is right for you?

With a company car, your employer provides the vehicle, sorts out the maintenance, and handles the admin. Sounds great, right? Just remember it’s not totally free, you’ll pay Benefit-in-Kind (BiK) tax, which is based on the car’s value and emissions. The greener the car (hello, EVs!), the lower the tax hit, making electric vehicles a brilliant choice.

On the flip side, there’s the car allowance. That’s basically extra cash added to your salary, also known as a salary sacrifice, giving you the freedom to lease, buy, or even keep driving your current ride. It’s taxed like normal income. So, if you're in the 40% tax bracket and get a £8,000 yearly allowance, you’ll only take home around £4,800 after tax and National Insurance.

Car allowances are perfect for those who want more freedom and control, but don’t forget to factor in extras like insurance, servicing, and depreciation. Many go for leasing, it offers that new-car feeling with fewer responsibilities. Additionally, it often includes perks such as breakdown cover, warranty protection, and optional maintenance packages. It’s a bit like having a company car… but on your own terms.

How to Make the Most Tax-Efficient Choice

Company car tax might not be the most exciting topic, or it might be, that's up to you! But if you’re weighing up a company car versus a car allowance, it’s something you need to understand. The tax you’ll pay depends on things like CO₂ emissions, electric range, and fuel type, all of which affect the Benefit-in-Kind (BiK) rate. Electric vehicles tend to be tax-friendly, but if you’re after more flexibility or already have a car you love, a car allowance might suit you better (just remember, it’s taxed as regular income). Tools like our company car tax calculator can help you crunch the numbers, and a quick chat with a tax advisor could save you money in the long run. Still unsure? Our team is here to guide you through the pros, cons, and everything in between, so you can make the smartest decision for your finances.

Here are a few questions we get a lot...

If you've got your own question, we'd love to help. Feel free to give us a call or contact us here.

How do I calculate BIK for my company car?

Use the P11D value and CO2 emissions of the car to find the BIK rate, then multiply by your income tax rate.

What cars have the lowest BIK rates?

Electric and low-emission vehicles typically have the lowest BIK rates.

How does BIK affect my payroll?

BIK is added to your taxable income, affecting the amount of tax deducted from your salary.

How does BIK affect self-employed individuals?

Self-employed individuals typically do not pay BIK tax, as BIK is a tax on employee benefits. However, self-employed individuals can claim car expenses through their business, which can offer tax advantages. It’s best to consult with an accountant to understand the most tax-efficient way to manage vehicle expenses if you’re self-employed.

What happens if I change my company car during the tax year?

If you change your company car during the tax year, your BIK liability will be prorated based on the time you use each car. The P11D value and CO2 emissions of the new car will determine the BIK rate for the remainder of the year. Your employer will update HMRC with the details, and your tax calculations will be adjusted accordingly.

Can I reduce my BIK tax by choosing a car with lower emissions?

Yes, choosing a car with lower CO2 emissions can significantly reduce your BIK tax. Cars with lower emissions fall into lower BIK rate brackets, resulting in lower taxable benefits. Electric and hybrid vehicles often have the lowest BIK rates, making them an attractive option for reducing your tax liability.

What is a P11D form, and why is it important?

A P11D form is used by employers to report the value of any benefits and expenses provided to employees, including company cars. It’s important because it details the BIK value that will be taxed. Employers must submit P11D forms to HMRC annually, and employees use the information to ensure their tax returns are accurate.

Are there any exceptions to paying BIK on company cars?

There are limited exceptions, but the more common exception is if the car is only used for business purposes and is not available for personal use or if the vehicle is classed as a commercial vehicle.

How does salary sacrifice impact BIK for company cars?

A salary sacrifice arrangement allows employees to give up a portion of their salary in exchange for a non-cash benefit, such as a company car. While this can reduce the employee’s taxable income, the BIK tax on the company car still applies. However, the overall tax savings from the salary sacrifice can make this an attractive option.

How do I report errors in my BIK calculation?

If you notice an error in your BIK calculation, you should notify your employer immediately. They can correct the information and submit an amended P11D form to HMRC. It’s important to address errors promptly to ensure you’re not overpaying or underpaying your tax liability.

Can BIK rates change during my lease term?

BIK rates are set annually by the government and can change from one tax year to the next. If BIK rates increase, your tax liability may also increase during your lease term. It’s important to stay informed about any changes to BIK rates and plan accordingly.

How can businesses manage BIK for a large fleet of vehicles?

Managing BIK for a large fleet requires careful planning and record-keeping. We can provide businesses with the use of fleet management software to track vehicle details, CO2 emissions, and employee usage. Regular reviews and updates ensure compliance with BIK regulations and help optimise the fleet for tax efficiency.

What support does HMRC offer for understanding BIK?

HMRC provides various resources to help employers and employees understand BIK, including online calculators, guides, and helplines. Visiting the HMRC website or contacting their support services can provide additional information and clarification on BIK-related queries.

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