Small Business Accountants

Company Car Tax Explained - Rates, Rules and Costs

Company car tax is a benefit in kind charged when an employer provides a vehicle for private use. For 2025/26, the taxable benefit equals the car's P11D value multiplied by its BIK percentage, starting at 2% for pure electric vehicles and rising by CO2 band to a 37% cap. Employees pay Income Tax on that amount, whilst employers owe 15% Class 1A NIC reported on form P11D by 6 July.

By Jordan Macey MAAT Reviewed by Noor Fiaz Updated 16 Apr 2026 6

Key takeaways

Company car tax for 2025/26 is calculated as the car's P11D value multiplied by its BIK percentage, then multiplied by the employee's Income Tax rate (20%, 40% or 45%).
Pure electric company cars (0 g/km CO2) carry a BIK rate of just 2% for 2025/26, rising to 3% in 2026/27, 4% in 2027/28 and 5% in 2028/29.
Employers must pay Class 1A National Insurance at 15% on the total BIK value of every company car provided, up from 13.8% in 2024/25.
The car fuel benefit multiplier is £27,800 for 2025/26, and the flat van benefit is £4,020, whilst zero-emission vans attract a £0 benefit through 2027/28.
Salary sacrifice arrangements for electric vehicles remain highly tax-efficient because the BIK charge is based on the low 2% rate rather than the full salary given up.

Introduction

The tax implications of providing a company car can be complex—and made even more confusing by HMRC's tax changes. To help you along, we've put together an article that will guide you through the essentials, such as who pays for company car tax and how it is calculated.

Our article will likely answer the key questions that you have surrounding company car tax, but bear in mind that it isn't a substitute for professional advice.

If you have further questions about tax and how it affects your business, do reach out our accountants at Forma for personalised advice.

Company car tax: The basics explained

What is company car tax?

It is a tax paid for by employees driving a vehicle (car, van or motorcycle) owned by the company they're employed at.

The tax is deducted from the employee's salary as part of the PAYE scheme, and recorded on a P11D form.

Who pays the company car tax?

Employees pay the company car tax via salary sacrifice; the tax is deducted from their salary as a benefit in kind (BIK) tax.

This means that you'll need to pay company car tax if the following applies:

You're an employee driving a company-owned car
You're self-employed, and are operating through a limited company. In this case, you're considered an employee of your company.

If you're an employer, you need to pay Class 1A National Insurance contributions, as well as file a P46 form for each company vehicle you own.

How is the company car tax calculated?

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There are several factors that determine the rates at which company cars are taxed.

These are:

The P11D value of the car
The amount of CO2 the car emits
The type of car (petrol, diesel, hybrid or electric)
The BIK rate of the car: This is based on the car's fuel type and CO2 emissions
The income tax bracket you're in
Access to car: The amount of time that you have access to a car across the tax year
A 4% surcharge imposed on diesel cars
The registration date of your vehicle

Further information on the P11D value and list price...

Before we dive into the calculations, we'll first explain the P11D value and list price in detail.

The P11D value refers to the total value of your car when it is brand new.

It includes the list price, VAT, delivery charges, standard accessories and optional extras. The first registration fee and annual road tax aren't included.

Additional modifications that are made to the vehicle should be included in the list price, even if these are made after delivery. There is one exception—additional modifications made after the delivery that cost less than £100 aren't added to the list price. The costs of accessories that are included by the manufacturer before the delivery of the car should also be included in the list price.

And if you plan to use a hybrid or electric car, you'll need to include the cost of the battery in the list price, even if the battery is leased separately.

Calculating your annual company car tax payment...

Now that you have the P11D value of the company car, you can then calculate the annual company car tax:

1. Multiply the car's BIK percentage rate by its P11D value. This figure is your BIK value.

2. Multiply the BIK value by the percentage rate of your income tax bracket (basic at 20%, higher at 40% or additional at 45%)

The value that you obtain is your annual company car tax payment.

What about diesel cars?

A diesel supplement of 4% will apply if you're:

Driving a diesel car that was registered between 1 January 1998 and 31 August 2017
Driving a diesel car that was registered on or after 1 September 2017, but isn't RDE2-certified.

The 4% supplement doesn't apply to diesel plug-in hybrids, as these are considered alternative fuel vehicles.

What about company car tax for electric and hybrid cars?

The BIK value of electric and hybrid cars is calculated using the same method that we've indicated for normal cars.

The current BIK rates (2021/22) for electric cars starts at 1%.

The amount of company car tax paid on hybrid cars will depend on how far the vehicles can be driven with zero emissions.

In April 2020, the government announced a change in the level of CO2 emissions used to calculate tax rates; the previous NEDC standard was replaced with the current WLTP figures.

As such, the BIK rate you'll use will depend on whether your vehicle was registered before 6 April 2020, or from 6 April 2020. We've included the two tax tables below.

BIK rates: 2021/22

Zero emission vehicles:

For the 2021/22 tax year, the BIK rate for zero-emission company cars is set at 1%.

The rate will apply regardless of the registration date of the vehicle.

Cars registered on or after 6th April 2020:

The effect of WLTP will be taken into account for cars registered from 6th April 2020.

There's a 1% reduction in 2021/22, and a 2% reduction was applicable in the previous tax year (2020/21). By April 2022, there won't be a difference between the NEDC and WLTP rates.

Diesel cars:

The 4% diesel supplement will continue to apply on the new rates.

However, vehicles that meet the RDE2 rules will be exempt.

Tax tables

Cars registered before 6 April 2020

Cars registered from 6 April 2020

Additional information

A car fuel benefit is charged to the employee or company director if he or she receives free fuel for private use in a company car.

This is classed as a benefit, so employees are required to pay tax on it. Gov.uk has a car fuel benefit calculator you can use to work out the tax to be paid.

Are there exemptions from tax on company cars?

You are exempt from company car tax if:

The vehicle is only used for business trips
The vehicle has been adapted for an employee with a disability. The vehicle should only be used for commuting to and from work and business purposes.
It is a shared vehicle that's kept on site, and shared by employees for business purposes.

Frequently asked questions

How is company car tax calculated for 2025/26?

Company car tax is calculated in two steps. First, multiply the car's P11D value (list price including VAT, delivery and extras, but excluding road tax and first registration fee) by the BIK percentage set by HMRC for the car's CO2 emissions and fuel type. Then multiply that figure by your Income Tax rate: 20% basic, 40% higher or 45% additional. The result is your annual company car tax bill, collected through PAYE.

What are the BIK percentages for electric and hybrid cars in 2025/26?

Pure electric cars emitting 0 g/km CO2 have a BIK rate of 2% for 2025/26. Plug-in hybrids emitting 1 to 50 g/km range from 2% (electric range 130 miles or more) up to 14% (electric range under 30 miles). Above 50 g/km, the BIK rate rises by 1% for every additional 5 g/km of CO2, capped at 37%. The electric car rate rises to 3% in 2026/27, 4% in 2027/28 and 5% in 2028/29.

How does the company car fuel benefit work?

If an employer provides free fuel for private use in a company car, a separate car fuel benefit charge applies. For 2025/26, the fuel benefit is calculated by multiplying the flat multiplier of £27,800 by the car's BIK percentage, then applying the employee's Income Tax rate. Employees who reimburse their employer for all private fuel are exempt. Employers pay 15% Class 1A NIC on the fuel benefit in addition to the car BIK.

What is the company van benefit for 2025/26?

The flat van benefit for 2025/26 is £4,020, with an additional van fuel benefit of £769 if free fuel is provided for private use. Both amounts are taxed at the employee's Income Tax rate and attract 15% Class 1A employer NIC. Zero-emission vans carry a £0 benefit charge through 2027/28, making electric vans completely free of BIK tax for both employee and employer during that period.

Is salary sacrifice for an electric car worth it?

Salary sacrifice for electric vehicles is typically very tax-efficient. The employee gives up gross salary in exchange for a company car, but the BIK charge is based on just 2% of the P11D value for 2025/26 rather than the full salary foregone. Both employee and employer save National Insurance on the sacrificed salary. Optional remuneration arrangement rules apply, but pure electric cars are specifically excluded from the higher-of comparison, preserving the low BIK charge.

What is P11D reporting and when is it due?

Employers must report every company car benefit on form P11D, submitted to HMRC by 6 July following the end of the tax year. For a car provided during 2025/26, the P11D deadline is 6 July 2026. The employer must also pay Class 1A National Insurance at 15% on the reported benefit, due electronically by 22 July. Failure to file on time can result in penalties of up to £300 per form, plus daily penalties for continued non-compliance.

How does employer Class 1A NIC apply to company car benefits?

Employers pay Class 1A National Insurance at 15% for 2025/26 on the full BIK value of each company car and any associated fuel benefit. This rate increased from 13.8% in 2024/25 following the Autumn Budget 2024. The charge covers all taxable benefits in kind reported on form P11D, not just company cars. Class 1A NIC is payable by 22 July following the tax year end and cannot be reclaimed from the employee.

Is a car allowance more tax-efficient than a company car?

A car allowance is treated as salary, so the full amount attracts Income Tax, employee NIC at 8% (above £12,570) and employer NIC at 15% (above £5,000). A company car is taxed only on its BIK value, which for an electric vehicle at 2% is a fraction of the car's cost. For lower-emission vehicles, a company car usually produces a smaller tax bill. For high-emission cars with BIK up to 37%, a cash allowance may be comparable.