Benefit-in-kind, in plain English
If your employer provides a company car that you can use privately, HMRC treats it as a non-cash benefit and charges you income tax on a notional value. That notional value is called the benefit-in-kind (BIK) value, and it is calculated as the car's list price (the P11D value) multiplied by an "appropriate percentage" set by HMRC. The appropriate percentage depends on the car's CO2 emissions and, for plug-in hybrids, its zero-emission electric range.
For 2026/27, fully electric cars carry an appropriate percentage of just 4%, rising by 1 percentage point per year until 2027/28. Petrol, diesel, and high-emission cars carry percentages from 25% up to a 37% cap. Plug-in hybrids fall in between, banded by their zero-emission electric range. The headline result is that an electric company car can carry a tax bill of just a few hundred pounds a year, while the same list-price petrol equivalent might cost £3,000+ in tax.
The maths
The BIK is computed as: P11D value × appropriate percentage = taxable benefit. You then pay income tax on that taxable benefit at your marginal rate. So a £50,000 EV at 4% gives a £2,000 taxable benefit; a 40% taxpayer pays £800 of income tax. The same employee in a £50,000 petrol SUV at 32% (155g/km CO2) would have a £16,000 taxable benefit and pay £6,400 of income tax — eight times as much.
The employer also pays Class 1A National Insurance on the same taxable benefit at the prevailing employer rate. That is not a cost to the employee directly, but it is part of the total cost-of-employment number a company will weigh when offering or refusing a particular car.
Salary sacrifice for EVs
The combination of low BIK on EVs and the option of salary sacrifice has made EV company cars unusually attractive. In a salary sacrifice EV scheme, the employee gives up a slice of gross salary in exchange for the car — saving income tax and National Insurance on the sacrificed amount and paying only the small BIK charge on the resulting benefit. For higher-rate taxpayers the combined saving over a personal lease can be substantial. See the salary sacrifice calculator and the company car / EV BIK calculator for working figures.
Fuel benefit and private use
If the employer pays for fuel used for private journeys, a separate car fuel benefit charge applies. The 2026/27 multiplier is £28,200, which is multiplied by the same appropriate percentage. For a high-emission car this is one of the most punitive line items in the entire UK tax code — most employees end up reimbursing private fuel rather than triggering it.
Pure electric cars are not subject to a fuel benefit charge — workplace charging and home charging reimbursement remain BIK-free under current rules.
Related on this site
Calculate the actual tax bill with the company car / EV BIK calculator, and see how a salary sacrifice EV scheme stacks up against a personal lease using the salary sacrifice calculator.
The core formula
A company car’s taxable benefit is usually list price × appropriate percentage, adjusted for some contributions and part-year availability. Your own income-tax rate is then applied to that benefit to work out the employee tax cost.
What changes the number fastest
- The BIK percentage, which depends mainly on CO2 and sometimes electric range.
- The list price, because a low percentage on a high-priced car can still create a meaningful bill.
- The separate fuel benefit if private fuel is provided and not fully reimbursed.
Best next page
Use Company Car and EV BIK Calculator for the actual 2026/27 estimate.
Official source: GOV.UK calculate tax on company cars.
How the tax is actually collected
You do not get a separate bill for company-car tax. Instead, HMRC reduces your tax-free allowance by the taxable benefit and recovers the tax through your tax code. If your benefit is £6,000, your code is cut by roughly that amount, so a 1257L code might become something in the 650-ish range — and a large benefit can even produce a K-prefix code, where the benefit exceeds your whole Personal Allowance and tax is added rather than subtracted. The deduction is spread across your pay packets over the year, which is why a company car quietly lowers your monthly take-home rather than arriving as a lump sum.
Employers report the benefit to HMRC, traditionally on a form P11D after the tax year ends, though many now payroll the benefit in real time so the tax is collected in the correct year rather than catching up a year late. Either way, when you first take a company car your code is usually adjusted mid-year on an estimate, so the first few months can over- or under-collect until HMRC settles on the right figure. If you give the car back, tell HMRC promptly — otherwise your code keeps charging you for a benefit you no longer receive.
Adjustments, capital contributions, vans and part-year use
The headline “list price × percentage” figure can be reduced in a few legitimate ways. A capital contribution you make towards the cost of the car (up to a £5,000 cap) is deducted from the P11D value before the percentage is applied. Any amount you are required to pay your employer each month for private use reduces the taxable benefit pound-for-pound. And if the car is only available for part of the year — you join in July, or swap cars mid-year — the benefit is time-apportioned, so you are only taxed for the months the car was actually at your disposal. A continuous run of more than 30 days without the car (for example while it is off the road) can also reduce the charge.
Two other points often catch people out. Vans are taxed quite differently from cars: a van available for private use carries a flat benefit charge rather than a list-price-times-CO2 calculation, and a van used only for business plus “insignificant” private journeys (such as the commute under the van rules) can carry no charge at all — zero-emission vans are treated especially favourably. And the appropriate percentages for cars are set to keep rising in future years, including for electric cars, so a company car that looks cheap today will gradually cost more in tax over a typical three- or four-year lease. Always check the percentage for the specific year before committing, and re-check it for the later years of any deal.
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