How Does Company Car Tax Work?
If your employer gives you a car you can use privately, HMRC treats that as pay. Not cash, but pay all the same, and it is taxed. The technical name is a benefit in kind, and the company car is the largest and most common one in the UK.
The tax is worked out from three numbers, and only three:
- The list price of the car when it was new.
- An appropriate percentage set by the car's CO2 emissions.
- Your income tax rate.
Multiply the first two together and you get the taxable benefit, sometimes called the cash equivalent. Multiply that by your tax rate and you get the annual bill. Your employer then pays Class 1A National Insurance at 15 percent on the same benefit figure, which is the part employees rarely see.
So a £40,000 car on a 25 percent band produces a £10,000 benefit. A higher rate taxpayer pays £4,000 a year in income tax on it, and the employer pays £1,500 in Class 1A. Nobody handed anybody £10,000, but £5,500 of tax leaves the building.
What is missing from that formula is anything about what the car cost the company, what it is worth now, or how far you drive it. None of those matter. This is a system that cares about one thing above all others, which is the number printed on the registration certificate.
Company Car Tax Rates for 2026/27
The appropriate percentage for 2026/27 starts at 4 percent for a fully electric car and climbs to a maximum of 37 percent.
| CO2 emissions (g/km) | Electric range (miles) | Appropriate percentage |
|---|---|---|
| 0 | n/a | 4% |
| 1 to 50 | 130 or more | 4% |
| 1 to 50 | 70 to 129 | 7% |
| 1 to 50 | 40 to 69 | 10% |
| 1 to 50 | 30 to 39 | 14% |
| 1 to 50 | Under 30 | 16% |
| 51 to 54 | n/a | 17% |
| 55 to 59 | n/a | 18% |
| 95 to 99 | n/a | 25% |
| 120 to 124 | n/a | 30% |
| 145 to 149 | n/a | 35% |
| Highest bands | n/a | 37% (capped) |
Between 55g/km and the cap, the scale moves up one percentage point for every 5g/km band. The full table is on GOV.UK and your lease provider will quote the exact figure for a given model, but the shape of it is what matters: emissions and tax move together, steeply.
Two adjustments sit on top. A diesel car that does not meet the RDE2 standard, sometimes labelled Euro 6d, adds 4 percentage points, still capped at 37 percent overall. Diesel hybrids are not caught by this. And the zero emission rate is going up every year from here, which we come to below.
What Counts as the List Price
This is where the first real money is lost, because the list price is not the price your company paid.
The figure HMRC wants is the manufacturer's published list price on the day before first registration, including VAT, delivery charges and any optional extras fitted. Not the invoice. Not the discount your fleet manager negotiated. Not the second hand value if the company bought it used.
Which produces an outcome that catches people out every year. A director haggles £6,000 off a £45,000 car and pays £39,000. The company saves £6,000 of real cash. The driver's benefit in kind is still calculated on £45,000, every year, for as long as they have the car. The discount is worth a great deal to the business and precisely nothing to the person driving it.
The same logic runs through optional extras. A £3,500 upgrade pack added at order adds £3,500 to the list price permanently. On a 30 percent car that is an extra £1,050 of taxable benefit a year, or £420 a year in tax for a higher rate driver, for as long as the car is theirs. Accessories fitted later count too if they cost £100 or more. It is worth knowing this before you tick the boxes rather than after.
Worked Example: Electric Against Petrol
Take two cars with the same £45,000 list price and one higher rate driver.
The electric car. Zero emissions, so 4 percent. The benefit is £1,800. Income tax at 40 percent is £720 a year, or £60 a month. The employer's Class 1A National Insurance is £270.
The petrol car. 145g/km, so 35 percent. The benefit is £15,750. Income tax at 40 percent is £6,300 a year, or £525 a month. The employer's Class 1A is £2,362.50.
Same money spent by the company, same driver, and the driver pays 8.75 times more tax on one than the other. The employer pays nearly £2,100 a year more as well. For a basic rate driver the electric car costs £360 a year in tax, which is less than most people spend on car washes.
This is the single most important thing to take away, and it explains almost everything about the UK company car market since 2020. The tax system has not made electric cars slightly cheaper. It has made them a different category of decision. A petrol company car in 2026 is, for most people, a worse way of being paid than simply being paid.
Company car tax is also one of the few areas where the interests of the company and the individual point the same way. Employer National Insurance rose to 15 percent in April 2025, so the 4 percent band saves the business real money too. If you want to sanity check what a change to your overall package looks like, our salary calculator covers the cash side, and our guide to directors' remuneration covers how a car fits alongside salary and dividends for an owner managed company.
The Cliff Edge at 51g/km
Most tax thresholds are gentle. This one is not.
A car emitting 50g/km with a decent electric range sits at 4 percent. A car emitting 51g/km sits at 17 percent. One gram, thirteen percentage points.
On our £45,000 car that is a benefit of £1,800 against £7,650. The higher rate driver pays £720 against £3,060, a difference of £2,340 every year, decided by a single gram on a certificate. We are not aware of another rule in UK personal tax where so much money turns on so small a measurement.
It matters practically because plug in hybrids cluster right around that line, and because the emissions figure can move when a manufacturer retests a model without changing anything mechanical. Which is exactly what has been happening.
The Plug-in Hybrid Easement
New emissions testing rules, Euro 6e-bis, assume plug-in hybrids do far less of their driving on battery than the old test did. Retested cars therefore report much higher CO2 despite being identical vehicles. Left alone, that would have pushed a large number of hybrids over the 51g/km cliff by administrative accident.
The government has legislated an easement. A plug-in hybrid is treated as emitting 1g/km if all of the following apply:
- It was registered on or after 1 January 2025 and on or before 5 April 2028.
- Its registration certificate shows CO2 of 51g/km or more.
- It has an electric range of at least one mile.
- The certificate does not show Euro 6d-ISC-FCM or Euro 6e in the Euro status section.
Read that last condition again, because it is the one that decides the outcome. The relief is available to cars that have not been retested. Two showroom identical hybrids, one registered before the manufacturer's retest and one after, can attract very different tax for their whole life on a company fleet. If you are ordering a hybrid, the Euro status line on the V5C is not paperwork. It is the most valuable piece of information in the transaction, and you should ask for it in writing before you sign.
Our honest view is that this is a sensible fix to an unfair outcome, and that it should not be mistaken for a reason to choose a hybrid. It is a shield against a tax rise, not a saving, and it has an expiry date that lines up almost exactly with the change in the next section.
April 2028 Is the Date Hybrid Drivers Should Have in Their Diary
The rates are already set out to 2029/30, and they change shape in 2028/29.
| Tax year | Zero emission | Most efficient hybrids (1 to 50g/km) | Maximum |
|---|---|---|---|
| 2026/27 | 4% | 4% | 37% |
| 2027/28 | 5% | 5% | 37% |
| 2028/29 | 7% | 18% | 38% |
| 2029/30 | 9% | 19% | 39% |
From April 2028 the electric range sub-bands disappear entirely. Every car emitting 1 to 50g/km lands on the same 18 percent, whether it can do 130 miles on battery or ten. Everything else moves up a point a year, and the cap rises above 37 percent for the first time in years.
For a hybrid driver that is not an increase, it is a step change. Our £45,000 example goes from a £2,250 benefit in 2027/28 to £8,100 in 2028/29. The higher rate driver's bill goes from £900 to £3,240 in one April, and the employer's Class 1A goes from £337.50 to £1,215. Nothing about the car changes.
Here is the practical point, and it is the reason we think this article is worth writing in August 2026 rather than in 2028. A four year lease signed today ends in mid 2030. A three year lease signed today ends in mid 2029. Both of them drive straight through the April 2028 change, and the driver will be locked into a car whose tax roughly triples with no way out that does not cost money. Very few people signing hybrid deals this year have been shown that arithmetic, because the people arranging the lease are not the people who will pay the tax.
If you are choosing a car now, compare the total tax across the whole term rather than the monthly figure in the first year. On a four year view the electric car wins by more than the first year comparison suggests, because 4, 5, 7 and 9 is a much gentler path than 4, 5, 18 and 19.
Car Fuel Benefit: Usually a Bad Deal
If your employer pays for fuel you use privately, there is a separate charge on top of the car benefit. It is calculated the same way, but instead of the list price it uses a fixed multiplier, which is £29,200 for 2026/27, up from £28,200.
Take the petrol car above at 35 percent. The fuel benefit is £29,200 × 35 percent = £10,220. A higher rate driver pays £4,088 a year in tax on it. The employer pays another £1,533 in Class 1A.
Now work out what that buys. At around 17p a mile of actual fuel, which is roughly where the advisory fuel rate sits for a mid sized petrol engine, £4,088 of tax buys you break even at about 24,000 private miles a year. Not business miles, private ones. Commuting, holidays, the school run. Very few people drive anywhere near that privately.
There is no partial version either. The charge is all or nothing. If you reimburse your employer for every penny of private fuel by the end of the tax year, the charge is zero. Reimburse 95 percent of it and you pay the full £4,088. It is the only benefit in kind we deal with where taxpayers routinely pay more tax than the perk is worth, and it survives mainly because "free fuel" sounds like something you would want.
For most drivers the right answer is simple. Give up the fuel card for private use, keep a mileage log, and have the employer reimburse business fuel at the advisory fuel rates, which creates no benefit and nothing to report.
Electricity Is Not Fuel
This is a small point with a surprisingly large effect, and a lot of employers still get it wrong.
For these purposes electricity is not a fuel. The car fuel benefit charge does not apply to an electric company car at all. That means an employer can pay for all of a driver's charging, including private mileage, with no fuel benefit charge whatsoever.
HMRC has also confirmed that reimbursing an employee for the cost of charging a company car at their own home is exempt, having previously said the opposite in its own manual. The condition is that the employer can show the electricity reimbursed was used to charge the company car or van, so a dedicated charger with its own reporting is worth having.
Put that next to the section above and the gap widens again. On a petrol car, free private fuel costs a higher rate driver £4,088 a year. On an electric car, the identical arrangement costs nothing.
Vans, Double Cab Pick-Ups and the Rules That Changed
Vans are taxed on a flat charge, not a percentage of list price, and only where there is private use beyond ordinary commuting. For 2026/27 the van benefit charge is £4,170, and van fuel benefit is £798. A higher rate driver pays £1,668 and £319 respectively.
A zero emission van attracts a nil charge, whatever the private use. That remains one of the most generous positions in the whole benefits code and it is badly underused by trades businesses.
Double cab pick-ups were the big change here. Following the Court of Appeal decision in the Coca-Cola case, HMRC accepted that a vehicle equally suited to carrying people and goods is not primarily a goods vehicle. From 6 April 2025 double cab pick-ups with a payload of a tonne or more are treated as cars for benefit in kind, which moves them from a flat £4,000ish charge to a percentage of list price on a diesel emissions figure, usually at or near the 37 percent cap.
Transitional rules apply where the vehicle was purchased, leased or ordered before 6 April 2025. Those keep the old van treatment until the earlier of disposal, the end of the lease, or 5 April 2029. If you run pick-ups, the date you ordered them is now a material tax fact, and it is worth having the paperwork filed somewhere you can find it.
Company Car, Car Allowance, or Your Own Car?
There is no universal answer, but the two routes have moved further apart, not closer, over the last two years.
A car allowance is just salary. It goes through PAYE, attracts income tax at your marginal rate, employee National Insurance and employer National Insurance at 15 percent. A £6,000 allowance leaves a higher rate employee with about £3,480 after tax and National Insurance, and costs the employer £900 in NI on top of the £6,000.
What the allowance driver gets in return is the ability to claim approved mileage allowance payments on business journeys in their own car, which rose to 55p a mile for the first 10,000 miles in April 2026, then 25p. Someone doing 15,000 business miles can receive £6,750 tax free. A company car driver cannot touch that. They can only be reimbursed for actual fuel at the advisory rates, which are a fraction of it.
So the decision has polarised:
- High business mileage, modest car. The allowance plus 55p a mile usually wins, and the April 2026 uplift made it win by more. Our guide to HMRC mileage rates covers the claim mechanics.
- Low business mileage, expensive car, low emissions. The electric company car usually wins, and it is not close. £720 a year of tax on the use of a £45,000 asset is not something the salary route can compete with.
- High emissions, any mileage. Take the cash.
Salary sacrifice car schemes sit between the two, and they are almost always electric for exactly the reasons above. Cars are normally caught by the optional remuneration rules that tax you on the higher of the salary given up or the benefit, but cars emitting 75g/km or less are carved out, which is what makes those schemes work at all.
Contributions: The Lever Everyone Gets Backwards
There are two ways an employee can pay towards a company car, and they are marketed as tax savings. Only one of them is close.
A capital contribution is a one off payment towards the cost of the car. It reduces the list price used in the calculation, permanently, up to a maximum of £5,000. On a 35 percent car, contributing the full £5,000 cuts the annual benefit by £1,750 and saves a higher rate driver £700 a year in tax. Over a typical four year term that is £2,800 back on a £5,000 outlay. Useful, but not the free money it is sometimes presented as, and you would want to be confident about how long you are keeping the car.
A private use contribution is a monthly payment for the use of the car. It reduces the taxable benefit pound for pound in the year it is paid. Which sounds excellent until you write it out: you pay £1 to your employer and you save 40p of tax. You are 60 pence worse off on every pound.
That is not an argument against ever making one. Where the employer requires a contribution as the price of a better car, or where it takes an employee under a threshold that matters elsewhere in their tax position, it can make sense. But contributions are frequently sold as a way of reducing your tax, and reducing your tax by handing over more than you save is not a saving. Ask what the contribution is actually buying you before you agree to it.
Pool Cars and Cars You Cannot Use
A genuine pool car produces no benefit at all. To qualify it must be available to more than one employee, used only for business, not ordinarily kept overnight at or near an employee's home, and any private use must be merely incidental to a business journey. HMRC tests all of those, and the overnight condition is the one that fails most often. A car that lives on a director's driveway is not a pool car, however many people are allowed to book it.
If a car is genuinely unavailable for a period of 30 consecutive days or more, the benefit is reduced proportionally. Off the road for a long repair, or handed back mid year, both count. This is easy to miss when the benefit is calculated once a year from a fleet list, and it is worth checking before the figures are finalised.
From April 2027 Your Company Car Goes Through Payroll
One more change, and cars are in the first wave of it.
Benefits in kind have historically been reported after the year end on a P11D, filed by 6 July, with the tax collected later through an adjusted tax code. From 6 April 2027 that becomes compulsory in real time for a specific list of benefits: company cars, car fuel, vans, van fuel and medical insurance. The income tax and the Class 1A National Insurance both go through payroll each month, alongside salary. Most remaining benefits follow in April 2028.
So 2026/27, the year we are in, is the last full year of the familiar rhythm for company cars. From next April the car appears on the payslip every month.
We think this is a genuine improvement for employees, who will see the cost of their car as it is incurred rather than discovering it in a coding notice months later. For employers it is a payroll project, not a form filling exercise, and it needs the fleet data to be right before April rather than in the following July. If your car records currently live in a spreadsheet that someone reconciles once a year, that arrangement has about eight months left in it. Our payroll team is already moving clients across ahead of the deadline.
Our View
Company car tax has quietly become one of the sharpest incentives in the UK tax system, and it is worth being blunt about what it now rewards.
If your car is electric, the company car is one of the very few genuinely efficient ways left to take value out of a limited company. Consider what has happened elsewhere. Dividend rates went up two percentage points in April 2026. The dividend allowance is stuck at £500. Employer National Insurance went to 15 percent. Against all of that, the electric company car sits at 4 percent, the company gets corporation tax relief on the lease payments or a 100 percent first year allowance on a new zero emission car bought outright, there is no fuel benefit, and home charging can be reimbursed tax free. For an owner managed company doing modest mileage in a reasonably expensive car, it is close to unbeatable, and it is one of the first things we look at when a director asks how to improve their overall position.
If your car is a hybrid, look at your lease end date before you look at anything else. April 2028 is a genuine cliff and a lot of deals being signed this year run straight over it.
If your car is petrol or diesel, the honest answer is usually that you should not have a company car. Take the allowance, buy or lease the car yourself, claim your business mileage at 55p, and stop paying tax on 35 percent of a list price you never paid.
One final caution about the direction of travel. Electric vehicle excise duty arrives in April 2028 at 3p a mile for battery electric vehicles and 1.5p for plug-in hybrids, rising with inflation from 2029/30, with the government's consultation response published in July. That is road tax rather than benefit in kind and it applies to the vehicle regardless of who owns it, so it does not change the company car comparison directly. But it is a clear signal that the current generosity towards electric cars is a transition policy rather than a settled position. Rates set to 2029/30 are a planning window, not a promise, and a car decision made today should be able to survive the next Budget.
How IAK Can Help
We advise directors and employers across North London on company cars, and the advice is nearly always the same in shape: run the numbers over the whole term, not the first year, and compare the car against the alternative of simply taking the money.
Our tax planning team models company car, car allowance and personal ownership side by side, including the 2028 rate changes and the interaction with how you take the rest of your income. Our payroll team handles P11D and P11D(b) reporting now, and is moving employers onto payrolled benefits ahead of the April 2027 deadline. Our accounting team makes sure the corporation tax side, lease deductions, capital allowances and VAT recovery, is claimed properly rather than approximately. For directors, our personal tax service ties it all back to your own return.
If you are not sure which of those you need, what does an accountant do is an honest answer, and you can contact us for a free consultation.
Sources
- Tax on company cars, GOV.UK, for the basis of the charge and the four conditions of the plug-in hybrid 1g/km easement.
- Company car benefit, the appropriate percentage (480: Appendix 2), GOV.UK, for the 2026/27 appropriate percentage bands and the 4 percent zero emission rate.
- Travel, mileage and fuel rates and allowances, GOV.UK, for the £29,200 car fuel benefit multiplier, the £4,170 van benefit charge, the £798 van fuel benefit charge and the approved mileage allowance payment rates.
- Budget brings benefit in kind changes, Association of Taxation Technicians, for the 2028/29 and 2029/30 appropriate percentages, the move of all 1 to 50g/km cars to a single band, and the increased caps.
- Changes to the tax treatment of double cab pick-ups, ICAEW, for the 6 April 2025 change and the transitional rules running to 5 April 2029.
- Electric charging of company cars and vans at home, CIPP, for HMRC's revised position on the section 239 ITEPA 2003 exemption and the updated EIM23900 guidance.
- Payrolling benefits in kind, BDO, for the phasing of mandatory payrolling from 6 April 2027 and the benefits included in the first phase.
- Electric Vehicle Excise Duty, Vehicle Certification Agency, for the April 2028 start date and the 3p and 1.5p per mile rates.