Company car tax: What business owners need to know
Company car tax explained for UK employers: How BIK works, 2026/27 rates and what it costs your business.
Written by Naomi Lai— Small business & finance writer. Read Naomi's full bio
Published Wednesday 23 September 2026
Table of contents
Key takeaways
- Company car tax is a benefit in kind charge on the private use of a business car, and the amount depends on the car's P11D value, its CO2 emissions, and the driver's income tax rate.
- As the employer, you pay Class 1A National Insurance at 15% on the taxable value of every company car, and you report it to HMRC each year.
- Electric company cars carry a very low benefit in kind rate of 4% in 2026/27, which makes them far cheaper to run as a benefit than petrol or diesel.
- A company car and a cash car allowance are taxed differently, so the right choice depends on your fleet, your drivers, and your admin capacity.
What is company car tax?
If you give an employee a company car they can use privately, that private use counts as a benefit-in-kind (BIK), and it's taxed. Private use includes commuting, so most company cars fall into scope.
There are two sides to the cost. The driver pays income tax on the value of the benefit, and you, the employer, pay Class 1A National Insurance on that same value. Both are worked out from the car's taxable value rather than what you paid for it.
Fuel is treated separately. If you provide fuel for private journeys, that's a second benefit-in-kind with its own charge, so it's worth deciding early whether you'll cover private fuel at all.
For a business with more than 20 employees, a company car is often part of a wider reward package rather than a one-off perk. Knowing how the tax works lets you offer cars consistently across teams and forecast the cost before you commit.
How is company car tax calculated?
The calculation uses one formula, and once you know the three inputs, you can work out the cost of any car in your fleet. Understanding how company car tax is calculated also helps you compare vehicles before you buy or lease them.
Here's the formula: taxable value = P11D value x the appropriate percentage (the BIK band) x the driver's income tax rate. The appropriate percentage is set by the car's CO2 emissions and fuel type, so cleaner cars are taxed less.
You don't have to do the sums by hand. HMRC provides a free company car tax calculator, and there are other free tools online, so you can check figures quickly before committing to a vehicle.
What is a P11D value?
The P11D value is the car's list price including VAT and delivery charges. It usually isn't the same as the price you negotiated or the monthly lease cost, and it stays fixed for the tax calculation even after the car loses value.
Because the P11D value drives the whole calculation, a lower list price means a lower tax bill for both the driver and your business. It pays to check the P11D value of each model on your shortlist.
A simple company car tax example
Numbers make this clearer, so here's a petrol car alongside an electric one. Take a petrol car with a £40,000 P11D value that sits in a 30% BIK band. The taxable value is £12,000, and a 40% taxpayer pays £4,800 a year, or £400 a month.
Now compare an electric car with the same £40,000 P11D value at the 4% rate for 2026/27. The taxable value is just £1,600, so the same 40% taxpayer pays £640 a year, about £53 a month. Same price tag, very different tax.
Company car tax rates for 2026/27
The appropriate percentage rises with a car's CO2 emissions, so a high-emission petrol or diesel model can reach the top of the scale while an electric car sits near the bottom. Rates increased by one percentage point from 6 April 2026, and they're set to keep climbing.
These are the headline rates and rules to plan around:
- Maximum band: The highest appropriate percentage is currently 37%, rising to 38% in 2028/29 and 39% in 2029/30.
- Low-emission cars: Vehicles emitting 1 to 50 g/km rise to 18% in 2028/29 and 19% in 2029/30.
- Diesel surcharge: Diesel cars that don't meet the RDE2 (Euro 6d) standard add a 4 percentage point surcharge, capped at the maximum band.
The direction of travel is clear, so factoring these increases into a multi-year fleet plan helps you avoid a rising tax bill later. You can check the official rates on the GOV.UK guide to tax on company cars.
Electric and low-emission company cars
Electric company car tax is one of the most tax-efficient options for employers who want to offer a benefit without a heavy tax cost. A fully electric car is taxed at 4% for 2026/27, against up to 37% for a high-emission model, which is a large gap on an identical list price.
The low rate holds for several years before it edges up, so you can plan a fleet refresh with some certainty. The appropriate percentage for electric cars follows this path:
- 2025/26: 3%
- 2026/27: 4%
- 2027/28: 5%
- 2028/29: 7%
- 2029/30: 9%
For a business running more than 20 employees, the maths scales fast. Moving even part of a fleet to electric cuts both the drivers' tax and your own National Insurance bill, and it's how many employing businesses now keep the cost of car benefits under control.
What company car tax costs you as an employer
On top of buying or leasing the car, you pay Class 1A National Insurance at 15% for 2026/27 on the car's taxable value. The fuel type decides how large that bill gets. In the electric car example above, with its £1,600 taxable value, Class 1A National Insurance costs the business £240 a year. On the petrol car, with its £12,000 taxable value, it costs £1,800 a year for the same list price.
Across a fleet, that difference multiplies. A group of 10 petrol cars like the one above would add £18,000 a year in National Insurance, while 10 equivalent electric cars would add £2,400. Choosing lower-emission vehicles is one of the clearest ways to keep employer costs down as you grow.
How to report and pay company car tax
Reporting is an annual routine, and getting the sequence right keeps you clear of penalties. These steps cover what you need to do as the employer.
1. Track each car benefit
Record the details of every company car you provide, including its P11D value, CO2 emissions, fuel type, and the dates it was available to each driver. Accurate records here make the rest of the process quick and keep your figures defensible.
2. Report the benefit to HMRC
Report car benefits on form P11D and declare your Class 1A National Insurance liability on form P11D(b). You can also payroll the benefit instead, which means taxing it through your payroll in real time rather than reporting it after the year-end.
3. Meet the deadlines
Submit your P11D and P11D(b) by 6 July after the end of the tax year. Pay the Class 1A National Insurance by 22 July, or by 19 July if you're paying by post, so leave enough time if you use cheque.
4. Keep your records and stay current
Hold on to your car and benefit records in case HMRC queries them. Note, too, that payrolling company car and car fuel benefits becomes mandatory from April 2027, so building the habit now will smooth that change. You can check or update a car's details through the HMRC company car service.
Company car vs a car allowance
Some employers offer a cash car allowance instead of a company car, and the two are taxed in different ways. A company car is taxed as a benefit in kind, while a company car allowance is extra salary paid through PAYE, so it's subject to income tax and National Insurance like normal pay.
Weighing the two comes down to a few practical points:
- Admin load: A cash allowance skips P11D reporting and Class 1A National Insurance, which cuts your year-end paperwork.
- Driver appeal: A low-emission company car can leave a driver better off after tax than the equivalent cash, especially with an electric model.
- Control and cost: A company car keeps the vehicle on your books and lets you standardise a fleet, while an allowance shifts the choice and running costs to the employee.
A cash allowance also gives drivers freedom to pick their own vehicle, though it can push some into a higher income tax band and won't deliver the electric car savings. A company car, by contrast, lets you set emissions standards across the fleet and keep every driver on tax-efficient models.
There's no single right answer. The best option depends on your headcount, the cars involved, and how much reporting you want to take on. Many growing businesses offer a mix, using electric company cars where the tax saving is largest and allowances elsewhere.
Simplify company car reporting with Xero
Company car tax is manageable once the records behind it are accurate and easy to find. With cloud-based payroll software, you can run payroll and keep the employee and benefit information you need for P11D reporting in one place, ready for each deadline.
Pairing that with tidy expense management helps you capture fuel and running costs as they happen, so nothing gets lost before year end. As you add drivers and vehicles, that structure keeps reporting quick rather than turning it into a month-end scramble.
FAQs on company car tax
These quick answers cover the questions UK employers might ask about company car tax.
How much company car tax will you pay in the UK?
As the employer you pay Class 1A National Insurance at 15% on each car's taxable value, so a £2,000 taxable value costs you £300 per year, while a £10,000 one costs £1,500.
Is a company car worth it in the UK?
It often is when the car is electric or low-emission, because the low benefit in kind rate keeps both your National Insurance and the driver's tax down while still offering a valued perk.
Is a company car tax deductible for the business?
You can generally claim the running and finance costs against your profits, and the Class 1A National Insurance you pay is itself an allowable business expense, though the treatment varies by car and finance type.
What changed with company car tax in 2025 and 2026?
Appropriate percentages rose by one point from 6 April 2026. The electric car rate moved from 3% in 2025/26 to 4% in 2026/27, and payrolling of car benefits became mandatory from April 2027.
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