A company car can be a great job perk to offer employees, usually provided to staff on permanent contracts whose jobs require extensive travel, such as travelling salespeople or employees who work at multiple locations. However, company cars impact the amount of tax paid by both the employer and the employee driving it.
Several factors decide how much tax is due on a company car, from the vehicle’s list price to the CO2 emissions it creates and the type of fuel used. That’s why it’s important to calculate precisely how much tax you pay to ensure you explore all your options and choose a vehicle that genuinely benefits your staff and your business.
In our guide we explain everything you need to know about company car tax in the UK. Understand the full tax implications for employer and employee, and how taxation works for travel expenses and fuel.
Table of Contents
How Does Company Car Tax Work?
A company car is a vehicle provided by an employer to be used by an employee for private and business purposes, including commuting.
HMRC classifies company cars as Benefit-in-Kind, often shortened to BIK. This means the employer and its employees must pay taxes and NICs on them based on government values. In addition, any fuel benefit provided by the employer is also subject to tax.
There are two ways of calculating and paying tax on a company car. The first is to calculate the car’s cash value, add it to the employee’s salary, and then tax it through payroll. Alternatively, the employer can declare the BIK by submitting a P11D form at the end of the tax year.
Unfortunately, for employees whose salary is close to the tax band threshold, a company car could push them into the higher tax band, raising the rate of tax they pay overall, thus reducing the benefit of having a company car.
The P11D form summarises the value of all the employee’s BIKs, which, along with a company car, can also include benefits such as medical insurance or childcare vouchers. Based on this information, HMRC calculates the tax due to be paid on BIKs.
The P11D value of the company car is based on three factors:
- The list price of the car, including VAT and optional extras
- Delivery charges, excluding the registration fee
- The first year of car tax
The higher the P11D value of the company car, the more tax must be paid.
You can use the gov.uk calculator to estimate the company car tax due to be paid to HMRC and the fuel benefits tax. To use this calculator, you’ll need to include information about the employee’s other income and tax information, as this affects the amount due.
How Much Tax Do You Pay For a Company Car?
From April 2025, the company car tax rates for electric vehicles (EVs) will gradually increase by 1% pa over a three-year period. This means the Benefit-in-Kind (BIK) tax rate for EVs will be 3% in the 2025/26 tax year, 4% in 2026/27, and 5% in 2027/28.
Similarly, the tax rates for ultra-low emission vehicles (ULEVs) that are not fully electric—specifically those emitting less than 75g/km of CO₂—will also rise. These rates will increase by 1% annually from April 2025 over three years, eventually reaching a maximum of 21%.
The tax to be paid on a company car is calculated by multiplying the P11D value by the CO2 emission bracket it falls into, which gives you its Benefit-in-kind (BIK) value.
Company Car Tax Benefit In Kind (BIK) Table
| Vehicle CO2 (g/km) | Electric Range (miles) | BIK Percentage FY 2021/22 [Standard] | BIK Percentage FY 2021/22 [non-RDE2 Diesel*] | BIK Percentage FY 2022/25 [Standard] | BIK Percentage FY 2022/25 [non-RDE2 Diesel*] | BIK Percentage FY 2025/26 [Standard] | BIK Percentage FY 2025/26 [non-RDE2 Diesel*] |
|---|---|---|---|---|---|---|---|
| 0 | 1% | – | 2% | – | 3% | – | |
| 1 – 50 | 130+ | 2% | 6% | 2% | 6% | 3% | 7% |
| 1 – 50 | 70-129 | 5% | 9% | 5% | 9% | 6% | 10% |
| 1 – 50 | 40-69 | 8% | 12% | 8% | 12% | 9% | 13% |
| 1 – 50 | 30-39 | 12% | 16% | 12% | 16% | 13% | 17% |
| 1 – 50 | Up to 30 | 14% | 18% | 14% | 18% | 15% | 19% |
| 51 – 54 | 15% | 19% | 15% | 19% | 16% | 20% | |
| 55 – 59 | 16% | 20% | 16% | 20% | 17% | 21% | |
| 60 – 64 | 17% | 21% | 17% | 21% | 18% | 22% | |
| 65 – 69 | 18% | 22% | 18% | 22% | 19% | 23% | |
| 70 – 74 | 19% | 23% | 19% | 23% | 20% | 24% | |
| 75-79 | 20% | 24% | 20% | 24% | 21% | 25% | |
| 80 -84 | 21% | 25% | 21% | 25% | 22% | 26% | |
| 85 – 89 | 22% | 26% | 22% | 26% | 23% | 27% | |
| 90 – 94 | 23% | 27% | 23% | 27% | 24% | 28% | |
| 95 – 99 | 24% | 28% | 24% | 28% | 25% | 29% | |
| 100 – 104 | 25% | 29% | 25% | 29% | 26% | 30% | |
| 105 – 109 | 26% | 30% | 26% | 30% | 27% | 31% | |
| 110 – 114 | 27% | 31% | 27% | 31% | 28% | 32% | |
| 115 – 119 | 28% | 32% | 28% | 32% | 29% | 33% | |
| 120 – 124 | 29% | 33% | 29% | 33% | 30% | 34% | |
| 125 – 129 | 30% | 34% | 30% | 34% | 31% | 35% | |
| 130 – 134 | 31% | 35% | 31% | 35% | 32% | 36% | |
| 135 – 139 | 32% | 36% | 32% | 36% | 33% | 37% | |
| 140 – 144 | 33% | 37% | 33% | 37% | 34% | 37% | |
| 145 – 149 | 34% | 37% | 34% | 37% | 35% | 37% | |
| 150 – 154 | 35% | 37% | 35% | 37% | 36% | 37% | |
| 155 – 159 | 36% | 37% | 36% | 37% | 37% | 37% | |
| 160+ | 37% | 37% | 37% | 37% | 37% | 37% |
The BIK value is then multiplied by the income tax bracket in which the employee’s salary is. This is either the Basic Rate of 20% tax, the higher rate tax band of 40%, or the Additional Rate tax band of 45%.
The factors that affect the amount of tax to be paid on a company car when calculating its BIK value include:
- The tax year
- The make and model of the vehicle
- The list price, including accessories, and minus employee contribution towards the car
- The P11D value
- What type of fuel the car uses
- The car’s CO2 emissions
- How often the car is used
BIK rates vary for cars registered before and after April 2020, when the way of measuring emissions was updated. The Government now uses the WLTP system for any cars registered from 6th April 2020 onwards
Use the GOV.UK’s Company Car Tax Calculator to determine the taxable value of your company car(s).
How Can I Reduce My Company Car Tax?
One effective way of lowering your company’s car tax rate is to provide an electric car. An electric vehicle (EV) has a BIK rate of 3% for the 2025/26 tax year, up from 2% in 2024/25. This reduces the tax rate to just a few pounds per month.
The next best thing to an EV for reducing the company car tax bill is a plug-in hybrid vehicle (PHEV), which runs on a combination of traditional fuel and an electric motor. The PHEV BIK rate depends on the vehicle’s C02 emissions and electric range, and cars producing lower emissions with a more extended range can qualify for a lower BIK percentage.
The most expensive company cars to tax are high-emitting, high-fuel-use cars, as HMRC has become increasingly challenging on emissions in recent years. Those top emission-generating vehicles can cost up to three times as much in tax as a PHEV of the same value.
If the tax on a company car is too high to be of much overall financial benefit, employers may consider offering a cash alternative to cover the cost of a personal car. This would include a fuel allowance paid per mile travelled or covering the fuel costs for business journeys.
These alternatives give employees the choice of which car they drive, which could save them money versus using a company car if they drive an older or cheaper car. However, newer models will likely result in higher monthly finance payments than the amounts imposed by the BIK tax.
Alternatives to the Company Car Model
As an alternative to a company car, employers may also consider incorporating a Salary Sacrifice Car Scheme, whereby the employee takes a salary reduction significant enough to qualify for a lower income tax rate and pays less National Insurance in exchange for leasing a new vehicle from the company.
The employer is then responsible for paying for the essential accessories that come with car ownership, such as road tax, repairs, maintenance and breakdown cover, which helps reduce the cost burden on the employee.
However, since 2021, the employee has been required to pay income tax on the amount of salary sacrificed, unless the car provided is exempt.
Cars provided through a salary sacrifice arrangement are exempt if the car is:
- Privately owned by the director or employees
- Used for business purposes only, including a carpool
- Shared and usually kept on company premises, or
- Has been adapted for an employee with disabilities for journeys between the home and the workplace or workplace training.
What Can I Claim As Travel Expenses?
Employees cannot claim a mileage allowance from HMRC if they drive a company car. However, company car drivers can claim fuel expenses for all business mileage where the employee has paid for the fuel. Business mileage for personal journeys in a company car cannot be claimed.
The owner of the car is responsible for paying to insure the vehicle, which in this case is the employer. The employer can also cover maintenance and repairs.
What Is The Tax On Company-provided Fuel?
If the employer covers the cost of all fuel used by a company car, including personal journeys, the employee also pays tax on this benefit.
The tax rate paid depends on the number of miles driven and the amount of CO2 the car emits. HMRC calculates it using a fixed amount, which is £28,200 for the 2025/26 tax year, up from £27,900 for the 2023/24 tax year, and £25,300 for the 2022/23 tax year. This is then multiplied by the car’s BIK tax band.
Please note that fuel tax is applied regardless of whether you spend £1 of company money on personal car fuel or £1,000,000; the BIK charge is a fixed amount.
Therefore, unless the employee uses the car for private journeys covering tens of thousands of miles each year, it makes more economic sense to pay for the fuel themselves. However, if the employee drives a car with a low emission rate for many miles annually, it would be cost-effective to pay the tax on company-provided fuel.
Below, we list the car fuel benefit charges for the current and previous tax years:
| Tax year | Fixed figure (£) |
|---|---|
| 2025/26 | 28,200 |
| 2024/25 | 27,800 |
| 2023/24 | 27,800 |
| 2022/23 | 25,300 |
| 2021/22 | 24,600 |
| 2020/21 | 24,500 |
| 2019/20 | 24,100 |
Can I Claim Business Mileage?
Business mileage covers business-related journeys, such as client visits or temporary workplace travel. Commuting from home to work and any other private journeys are not covered. Business mileage costs detract from the company and sole trader profits and, therefore, reduce the amount of tax owed at the end of the financial year, so it makes good sense to claim for this.
Both sole traders and limited companies can claim business mileage. Employees can claim from you as their employer. If you don’t pay employees business mileage or pay a lower amount than the HMRC’s approved mileage rates, those employees can claim the difference from HMRC at the end of the financial year.
Is it Worth Having a Company Car?
There are several benefits to having a company car. First is the obvious advantage of allowing employees to drive a safe, modern car. For companies that want to project a particular image, having their employees drive their chosen vehicles can contribute to this. There are even specialist luxury company car fleets to choose from.
Previously, companies often had a fleet of vehicles from which employees would be allocated a car. However, in recent times, many companies have switched to providing a list of pre-approved cars that employees can purchase at a special rate.
For the employee, having a company car brings the benefit of having insurance and maintenance covered by their employer while not having to be tied into a financial contract. They also don’t have to deal with the car’s depreciating value, as they don’t own it, and they likely get to drive a new model every few years.
Overall, it’s generally cheaper to pay the tax on a company car than to lease the same car from a private source. However, if the employee has a particular preference for a car not provided by the employer or already owns a car they are happy with, then a company car is less of an attractive benefit.
The low electric company car tax rates mean it’s almost always preferable to acquire an EV or PHEV through a company car scheme than to buy one privately.
Find out more about business car finance options in our guide.
Can Sole Traders Have Company Cars?
Sole traders, by definition, have no company and, therefore, cannot have a company car. However, they can still claim mileage and other expenses for a car used for business purposes. Sole traders have a choice. They can either claim full running costs of the vehicle, including insurance, servicing, repairs, and fuel minus an appropriate amount taken off for personal journeys, or they can claim full business mileage rates for business journeys as set by HMRC. For example, for 2023/24, you can claim fuel at a rate of 45p per mile up to 10,000 miles for a van or car and, 25p per mile after that, and 24p per mile when driving a motorbike.
Calculating your company car tax can be complex. For further advice and information regarding company car tax and how DS Burge & Co can help, get in touch with our friendly team of accountants today.