Looking to order your next company car?

Company cars are a popular employee benefit in the UK, but the rules around tax can be confusing.

Whether you receive a company car, participate in a salary sacrifice scheme, or take a cash allowance, you want to know the exact amount you will pay. This guide will clarify the latest company car tax rules and explain how to calculate your costs.

I get a company car with no cash alternative

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I have the option to take a company car or a cash allowance

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Company Car Tax FAQs

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Company Car Drivers

If you drive a company car with no cash alternative, you will be required to pay tax on the “Benefit in Kind” (BiK) of using an employer-provided car for personal use. This BiK tax is commonly referred to as company car tax.

BiK rates vary depending on the amount of CO2 emissions produced by the car. The higher the emissions, the higher the rate of Benefit in Kind (BiK) tax. Therefore, electric cars qualify for the lowest company car tax rates. This is an important factor to consider when choosing your company car, as the savings from selecting an electric car can be significant.

Diesel car drivers are subject to a 4% supplementary charge based on the P11D value of the car. However, if you drive a modern, clean diesel that meets the RDE2 certification for nitrogen oxide emissions, you will be exempt from this charge.

Currently, the maximum BiK rate for company cars is 37% of the P11D value.

To view the BiK tax rate tables through to 2030, click here.

Calculating Company Car Tax

The amount of company car tax you pay depends on several factors. This includes the car’s P11D value, CO2 emissions, your personal tax rate, and whether you opt for a cash allowance instead.

Understanding company car tax can seem complicated. However, if you break it down, it is easy to ensure that your car choice fits your budget. The following section will explain how to calculate company car tax.

How much company car tax will I pay?

The amount of company car (BiK) tax you pay depends on four key criteria:

  • 1

    The carbon dioxide (CO2) emissions per kilometre of your chosen car.

  • 2

    The value of the car when new, including any optional extras – this is known as the P11D value

  • 3

    Whether you are a Basic (20%), Higher (40%) or Additional Rate (45%) tax payer

  • 4

    Whether you have access to the car all or some of the time and whether you make any personal contribution towards its cost

We will take a look at each of these in turn.

1. CO2 emissions

CO2 emissions are used to determine what proportion of the car’s value is taxable. The more CO2 it emits per kilometre, the higher the taxable proportion of the car’s value.

For example:

  • Tax on a petrol car emitting between 60 grams and 64 grams of CO2 per kilometre would be 19% of its value in the 2026/27 tax year.
  • Tax on a diesel car (that doesn’t meet RDE2 rules) emitting between 125 grams and 129 grams of CO2 per kilometre would be 35% of its value in the 2026/27 tax year.

HMRC regularly revises the CO2 bands, meaning that the company car tax you pay may change over the life of the car. Therefore, by choosing a car with lower CO2 emissions, you may be able make a significant difference to your company car tax bill.

For more information, visit the HMRC website.

2. The value of the car (P11D value)

You should also consider the value of the car. Your employer will complete a P11D form to send to HMRC to notify them of the benefits you have received. The P11D value of a car is the value included on this form, which includes the list price, any factory-fitted options, VAT, and any deliver charges.

The P11D value of a car includes the list price, any factory-fitted options, VAT, and any delivery charges. It does not include the car’s first registration fee or its annual vehicle tax (VED). You can keep the P11D value down by selecting a vehicle with a lower list price and being careful about the number of options you add.

3. Your personal income tax band

Another significant factor affecting your company car tax is your personal income tax band. The income tax bands for 2026/27 in England and Northern Ireland are as follows:

  • Basic Rate tax payers – Up to £50,270 – 20%
  • Higher Rate tax payers – £50,271 to £125,140 – 40%
  • Additional Rate tax payers – Over £125,140 – 45%

The higher your income tax rate, the more BiK company car tax you will pay. For more information on tax bands, visit the HMRC website.

4. Personal contributions and availability of the car

If you make a one-off contribution to car cost, this will deduct from the final BiK tax liability. Similarly, any payments made to your employer for the private use of a company car will deduct from the BiK tax charge.

If you are unable to use your company car for 30+ consecutive days, your BiK tax will reduce based on the time you do not have access to it. For example, if your car is undergoing extensive repairs and you don’t take a replacement car.

For more information on how personal contributions and car availability affect your tax liability, use HMRC’s Company Car Tax calculator.

Company Car Tax Examples

The following examples show how the P11D value of the car, its CO2 emissions, and income tax rate are used to calculate the amount of BiK tax.

Company car tax is calculated as follows:

P11D Value x BiK Rate = BiK Value

Then BiK Value x Personal Tax Rate = Annual Company Car Tax

Note: for salary sacrifice drivers, or those with a cash allowance alternative, income tax may be payable on the cash value rather than company car benefit tax.

Example 1: Petrol

VW Golf 1.5 TSI Style 150PS

  • P11D Value – £31,180
  • CO2 Emissions – 124g/km – 30% of P11D value is taxed in 2026/27
  • Employee’s income tax rate – Higher 40%

In this example:

£31,180 x 30% = £9,354

£9,454 x 40% = £3,742 Annual Company Car tax

Or £311.83 per month

Example 2: Mild Hybrid (Petrol)

VW Golf 1.5 eTSI 150 Style DSG

  • P11D Value – £32,780
  • CO2 Emissions – 117g/km – 29% of P11D value is taxed in 2026/27
  • Employee’s income tax rate – Higher 40%

In this example:

£32,780 x 29% = £9,506

£9,506 x 40% = £3,802 Annual Company Car tax

Or £316.87 per month

Example 3: Electric

VW ID.3 Pro Match 59kWh

  • P11D Value – £36,595
  • CO2 Emissions – 0g/km – 4% of P11D value is taxed in 2026/27
  • Employee’s income tax rate – Higher 40%

In this example:

£36,595 x 4% = £1,464

£1,464 x 40% = £586 Annual Company Car tax

Or £49 per month

Example 4: Plug-in Hybrid

VW Golf 1.5 TSI eHybrid Style 204PS

  • P11D Value – £37,280
  • CO2 Emissions – 25g/km – 7% of P11D value is taxed in 2026/27
  • Employee’s income tax rate – Higher 40%

In this example:

£37,280 x 7% = £2,610

£2,610 x 40% = £1,044 Annual Company Car tax

Or £87 per month

To use HMRC’s company car tax calculator, click here.

Fuel Costs and Employer Provided Private Fuel

When choosing a new car, it is important to factor in the cost of fuel for your personal journeys. Opting for a car with lower fuel consumption can reduce the frequency of visits to the pumps. However, you should also consider the car’s value and the cost of the fuel it requires.

Fuel Types

Diesel cars have traditionally offered better fuel efficiency than petrol. However, they have also had higher list prices (and therefore P11D values) compared to petrol. Additionally, petrol and diesel prices fluctuate, with diesel sometimes being the more expensive option. However, improving petrol engine technology has closed the gap on diesel in recent years.

Importantly, we now have a wide choice of alternative fuelled cars, including hybrids, plug-in hybrids (PHEVs), and battery electric (BEVs).

Battery electric cars have the lowest fuel costs and are have become very practical for everyday transport. The increasing ranges and widespread availability of public charging stations contribute to this trend. Not to mention, they benefit from the lowest rate of BiK, at just 4% for the 2026/27 tax year.

Hybrids use supplementary batteries and electric motors to enhance the overall efficiency of their internal combustion engines. As a result, they have become increasingly common on company car choice lists.

Plug-in hybrids allow you to travel a certain distance on battery power alone, with a conventional engine to take over beyond that range. These have become popular as company cars, as their high fuel efficiency and low CO2 emissions mean lower BiK.

Evidently, the BiK rates for electric and plug-in hybrid are significantly more attractive than petrol and diesel. As of the 2026/27 tax year, the BiK rate for cars that emit 50g/km or less with an electric range of >130 miles is 4%. This includes fully electric and some plug-in hybrid models. The maximum BiK tax rate is currently 37% for cars that emit over 155g CO2/km.

Employer Provided Private Fuel

If your employer offers free fuel for private journeys, you should calculate whether this benefit is greater than the extra BiK tax that you will pay. If you cover many private miles, it could be worth considering. However, if your private mileage is low, it probably isn’t.

To calculate the BiK tax you’ll pay on free private fuel, you use a similar method to working out your company car tax, but replace the value of the vehicle with HMRC’s Car Fuel Benefit Multiplier. For the 2026/2027 tax year, this is £29,200.

Here’s an example:

VW Golf 8 1.5 TSI Life 150PS

  • Fuel Benefit Multiplier x BiK Rate % x Income Tax Rate % = Annual Fuel Benefit Tax
  • £29,200 x 31% x 20% = £1,810.40 Annual Fuel Benefit Tax

Use this calculator to work out the break-even private mileage for cars you might be considering.

Tax Rules for Company Cars Where a Cash Alternative is Offered

From 6 April 2017, the rules changed for drivers who have the choice of a company car or a cash alternative. Previously, drivers who had this choice and chose to take a company car paid tax on the Benefit-in-Kind (BiK) value of their car.

Drivers now pay tax on either the BiK value of their car or the value of their cash alternative, whichever is higher. In this case, drivers who select a car with a low P11D value and/or low CO2 emissions, may no longer benefit from a reduced tax bill as they may have to pay income tax on the full amount of their cash alternative.

Drivers choosing an Ultra-Low Emission Vehicle (ULEV – cars emitting 75g/km CO2 or less) after 6 April 2017 are also exempt from the tax changes. To learn more about the tax advantages of running a ULEV click here.

    Cash Allowance Example

    For a petrol car emitting 120 g/km with a P11D value of £18,000, the tax for 2026/27 would currently be due at your highest tax rate on £5,400 (P11D value of £18,000 x 30% BiK rate). If your marginal rate of tax was 40%, you would pay £2,160 in tax. Your employer would also pay class 1A NIC on the same value.

    If you had the option of taking a cash alternative of £6,000, you would pay tax on this rather than the £5,400. So the tax you pay would be £2,400 rather than £2,160.

    However, if your cash allowance was just £4,000, you would pay tax on the £5,400 BiK value, as in the first part of the example.

    FAQs

    If you have a question about company car tax, we have probably been asked it before. If you cannot find the answer to your question, feel free to contact us.

    Please note: we are unable to provide specific tax advice and you should consult a tax professional before making any decision.

    In the UK, families are entitled to Child Benefit for children until 16 years old, or until they are 19 if they stay in approved education or training. HMRC is informed of this.

    Child Benefit entitlement is linked to earnings. On the condition that either parent earns over £60,000, there will be tax to pay on the benefit if they still chose to claim it. Depending upon how much over £60,000 they earn, the tax liability eventually erodes the value of the benefit.

    The calculation for higher income doesn’t just take into account a parent’s salary, it also considers other benefits. If the value of the other benefits means HMRC considers a parent to be a higher earner, they will face a tax bill and be required to complete a self-assessment.

    Company cars, or the value of cash allowances taken in lieu, are considered in calculating an individual’s exposure to income tax, and they have an impact on Child Benefit too.

    In order for high earning parents to make an informed decision about whether they continue to claim Child Benefit, the HMRC has developed a calculator that can be accessed here.

    Parents can make their own judgements as to the extend of benefits erosion and make an informed decision about whether to opt out, or continue to receive the benefit.

    In answering this, we assume that you are referring to a monthly cash sum that you have opted for instead of a company car. This amount is simply added to your salary for income tax and National Insurance purposes. Therefore, the amount of tax you pay on the allowance will depend on the total amount you earn. Visit the HMRC website for more details on income tax and NI rates and thresholds.

    This will vary considerably depending on the industry you work in, your role, and your employers benefit policy. Typically, organisations set company car cash alternatives at around the level that they would be willing to pay to lease a car appropriate to your job grade. However, some organisations may choose to incentivise employees to take a car over cash. For intstance, for health and safety or environmental reasons. As a result, this could reduce the cash allowance.

    This depends on a number of factors, including:

    1. The CO2-based BiK tax rate that the car falls into. Click here to see the full BiK tax tables for 2025 to 2030.
    2. The value of the car, including any options – known at its P11D value.
    3. Your marginal (highest) income tax rate.
    4. Whether you have use of the car all the time and whether you make any personal contributions towards its cost

    Assuming you do not make contributions and you have access to the car all the time, this formula is used to calculate how much you will pay:

    P11D Value x Benefit-in-Kind Tax Rate x Marginal Income Tax Rate = Annual Company Car Tax Liability

    Understanding the tax implications of a company car is important. Although, you should also consider exactly what you need from your next car. This means assessing criteria such as the length and frequency of your journeys, how much room you need, and if there are any specific features that you require. When you have considered these, you will have a good idea of what type of car will be right for you. Subsequently, you can consider exactly which make and model will cost you the least in company car tax.

    The best place to start is looking at the, CO2-based BiK tax band that each car falls into. These vary enormously (from 3% to 37% of the car’s value in the 2025/26 tax year). So, by choosing a car with the lowest possible CO2 emissions you can minimise your tax bill. Click here to see the full tables of BiK tax bands from 2025 to 2030.

    Another key factor is the value of the car, including any optional extras. The higher the value, the greater the tax liability. So, think carefully about which equipment you really need before ordering.

    If you want to know how tax is calculated on a company car, you first need to understand the formula used to calculate the tax liability. This is:

    P11D Value x Benefit-in-Kind Tax Rate x Marginal Income Tax Rate = Annual Company Car Tax Liability

    Then, by plugging in the right variables, you can calculate your annual company car tax bill. The P11D value will be available from the manufacturer’s website. In addition, you need to add the value of any optional equipment specified to get the overall price. The website should also provide the official CO2 emissions rating. You will need this to find the correct BiK tax rate from the tables available here.

    To answer this, you need to have made a decision about whether to take a company car or opt for a cash allowance. If you choose to take cash instead of a company car, this will be treated as an addition to your salary and both income tax and National Insurance will apply. If you take the car, you will be taxed on the higher of the value of your cash allowance, or the Benefit-in-Kind value of the car. So, the amount that a company car adds to your taxable salary depends on this choice as well as the value of the benefits on offer.

    In the 2025/26 tax year, the BiK tax rate for Battery Electric Vehicles (BEVs) is 3%. For Plug-in Hybrid cars, the tax rate varies depending on how many miles the car can cover under battery power alone and its overall CO2 emissions. See the full table here.

    For outright purchase, the amount of deductible tax depends on the CO2 emissions of the vehicle. If the car is new and unused and has CO2 emissions of 0g/km, the full amount of the purchase price is deductible in the first year. If the car is a second hand electric or has CO2 emissions of 50g/km or less, they attract an 18% deduction. Lastly, if the cars emissions are over 50g/km, they get a 6% deduction.

    For leased cars, in general terms, the rental payments for the vehicle are deductible as business expenses. For cars emitting over 50g/km CO2, this is reduced by 15%.