A company car is a taxable benefit. Here’s how the tax is calculated, the latest BIK rates, and how to work out whether a company car or car allowance is better for you.
Company car tax — formally called Benefit in Kind (BIK) taxation — is one of the most misunderstood areas of employment taxation. Many employees assume they’re getting a free car, not realising that HMRC treats the personal use of a company car as additional income that must be taxed. The good news is that for electric vehicles, the BIK rates are so low that the tax bill can be remarkably small. The bad news is that for a conventional petrol or diesel car, the tax cost can easily exceed £4,000–£5,000 per year — sometimes more than simply buying the car yourself would cost on finance.
The biggest decision most employees face is whether to take a company car or opt for a cash car allowance instead. The answer has changed dramatically over the past few years as electric vehicle BIK rates have been kept artificially low by the government to encourage adoption. For EV drivers, a company car is almost always the better financial choice.
How Company Car Tax Works
| Step | Detail |
|---|---|
| 1 | Find the P11D value of the car (list price + options, minus first-year registration fee and road tax) |
| 2 | Find the BIK percentage based on the car’s CO2 emissions |
| 3 | Calculate the taxable benefit: P11D value × BIK % |
| 4 | Apply your income tax rate to the taxable benefit |
| 5 | That’s your annual company car tax bill |
Formula
Annual tax = P11D value × BIK % × Your tax rate
BIK Percentage Rates — Electric and Low Emission
The government has published BIK rates for electric vehicles several years in advance to give company car drivers and fleets confidence to commit to EVs. The rates rise by 1–2% each year but remain dramatically below those for petrol and diesel cars. Even by 2027/28 at 5%, an EV’s BIK tax will be a fraction of what a comparable petrol car attracts at 34%+.
| CO2 emissions (g/km) | Electric range | 2024/25 | 2025/26 | 2026/27 | 2027/28 |
|---|---|---|---|---|---|
| 0 (pure electric) | N/A | 2% | 3% | 4% | 5% |
| 1–50 | 130+ miles | 2% | 3% | 4% | 5% |
| 1–50 | 70–129 miles | 5% | 5% | 7% | 8% |
| 1–50 | 40–69 miles | 8% | 8% | 10% | 11% |
| 1–50 | 30–39 miles | 12% | 12% | 14% | 15% |
| 1–50 | Under 30 miles | 14% | 14% | 16% | 17% |
BIK Rates — Petrol and Diesel
Petrol and diesel BIK rates have risen significantly in 2026/27 — increasing by 2 percentage points across most emission bands. A car that was in the 32% band in 2025/26 is now in the 34% band, adding hundreds of pounds to annual tax bills for higher-rate taxpayers. This annual creep is deliberate government policy to make fossil-fuel company cars progressively more expensive relative to EVs.
Note that BIK percentages are capped at 37% regardless of emissions.
| CO2 emissions (g/km) | 2025/26 BIK % | 2026/27 BIK % |
|---|---|---|
| 51–54 | 15% | 17% |
| 55–59 | 16% | 18% |
| 60–64 | 17% | 19% |
| 65–69 | 18% | 20% |
| 70–74 | 19% | 21% |
| 75–79 | 20% | 22% |
| 80–84 | 21% | 23% |
| 85–89 | 22% | 24% |
| 90–94 | 23% | 25% |
| 95–99 | 24% | 26% |
| 100–104 | 25% | 27% |
| 105–109 | 26% | 28% |
| 110–114 | 27% | 29% |
| 115–119 | 28% | 30% |
| 120–124 | 29% | 31% |
| 125–129 | 30% | 32% |
| 130–134 | 31% | 33% |
| 135–139 | 32% | 34% |
| 140–144 | 33% | 35% |
| 145–149 | 34% | 36% |
| 150+ | 37% | 37% |
Diesel supplement: Most diesel cars that don’t meet RDE2 testing standards have a 4% surcharge added (still capped at 37%).
Tax Calculation Examples
The three examples below illustrate how dramatically the choice of car affects your tax bill. All figures assume a 2026/27 tax year calculation.
Example 1: Electric Car
| Detail | Amount |
|---|---|
| Car | Tesla Model 3 |
| P11D value | £42,000 |
| CO2 emissions | 0 g/km |
| BIK rate (2026/27) | 4% |
| Taxable benefit | £42,000 × 4% = £1,680 |
| Tax (20% taxpayer) | £1,680 × 20% = £336/year (£28/month) |
| Tax (40% taxpayer) | £1,680 × 40% = £672/year (£56/month) |
Example 2: Petrol Car
| Detail | Amount |
|---|---|
| Car | BMW 3 Series (petrol) |
| P11D value | £38,000 |
| CO2 emissions | 135 g/km |
| BIK rate (2026/27) | 34% |
| Taxable benefit | £38,000 × 34% = £12,920 |
| Tax (20% taxpayer) | £12,920 × 20% = £2,584/year (£215/month) |
| Tax (40% taxpayer) | £12,920 × 40% = £5,168/year (£431/month) |
Example 3: Plug-in Hybrid
| Detail | Amount |
|---|---|
| Car | BMW 330e (PHEV) |
| P11D value | £43,000 |
| CO2 emissions | 32 g/km |
| Electric range | 60 miles |
| BIK rate (2026/27) | 10% |
| Taxable benefit | £43,000 × 10% = £4,300 |
| Tax (20% taxpayer) | £4,300 × 20% = £860/year (£72/month) |
| Tax (40% taxpayer) | £4,300 × 40% = £1,720/year (£143/month) |
Company Car vs Car Allowance
The company car vs car allowance question is one of the most common financial decisions for employees who receive a company car entitlement. A car allowance is simply extra cash salary — it is taxed as income and subject to NI, significantly eroding its value. The table below sets out the key differences.
| Factor | Company car | Car allowance |
|---|---|---|
| Tax payable | BIK tax (can be very low for EVs) | Taxed as income (20/40/45%) |
| National Insurance | No employee NIC on BIK | Employee NIC payable on allowance |
| Insurance | Usually provided by employer | You arrange and pay |
| Maintenance/servicing | Usually provided | You pay |
| Fuel | Often a fuel card (taxable benefit) or you pay | You pay |
| Choice of car | Limited to company fleet/approved list | Any car you want |
| Mileage | Business mileage often covered separately | Claim mileage at approved rates (45p/mile first 10,000) |
Comparison Example
| Element | Company car (EV, £40,000) | £6,000 car allowance |
|---|---|---|
| BIK tax (40% taxpayer) | £40,000 × 4% × 40% = £640/year | N/A |
| Income tax on allowance | N/A | £6,000 × 40% = £2,400/year |
| Employee NIC on allowance | N/A | £6,000 × 2% = £120/year |
| Insurance | Employer pays | ~£600/year |
| Servicing | Employer pays | ~£500/year |
| Net cost to you | £640/year | ~£3,620/year |
For electric vehicles, the company car is dramatically cheaper.
Salary Sacrifice for Electric Vehicles
Electric vehicle salary sacrifice schemes have become one of the most popular employee benefits in recent years, and for good reason: they can reduce the real cost of a brand new EV by 30–40% compared to buying independently. The saving comes from three sources — income tax relief, NI savings (both employee and employer), and the ultra-low 4% BIK rate.
| Feature | Detail |
|---|---|
| How it works | You give up (sacrifice) part of your gross salary in exchange for an electric company car |
| Tax saving | You pay BIK at just 4% (2026/27) instead of income tax + NIC on the sacrificed salary |
| Who benefits | Both you and your employer save on NIC |
| Example | Sacrifice £500/month gross → car costs you ~£335/month net (after tax/NIC savings) |
| Risk | If you sacrifice below the NMW threshold, the arrangement may not be permitted |
Company Fuel Benefit
If your employer provides free fuel for private use, HMRC applies a separate fuel benefit charge — and it is almost always more expensive than the petrol or diesel you actually use. The multiplier is a fixed figure (£27,800 in 2025/26) multiplied by the car’s BIK percentage and your tax rate. For most drivers who don’t cover very high private mileage, opting out of the fuel benefit and paying for your own fuel is significantly cheaper.
| Detail | 2025/26 | 2026/27 |
|---|---|---|
| Fuel benefit charge (multiplier) | £27,800 | TBC |
| Tax calculation | £27,800 × BIK % × tax rate | |
| Example: 28% BIK, 40% taxpayer | £27,800 × 28% × 40% = £3,114/year |
Tip: Unless you do significant private mileage, the fuel benefit is often not worth it — consider opting out and paying for your own fuel.
Your P11D
| Detail | Information |
|---|---|
| What it is | A form your employer submits to HMRC listing your benefits in kind |
| When | By 6 July after the end of the tax year |
| What it shows | P11D value of your car, BIK percentage, fuel benefit, and other benefits |
| Impact | HMRC adjusts your tax code to collect the extra tax through PAYE |