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. Our car costs guide can help you weigh that against the full cost of running and financing your own vehicle.
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. For future planning, the government has also published 2027/28 BIK rates — petrol and diesel rates continue to rise by 1–2% each year, while EV rates climb slowly from their current low base.
| 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. See our full company car vs car allowance guide for a detailed worked comparison. In brief: 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 |
Salary sacrifice for EVs is particularly powerful for higher-rate taxpayers, who save 40% income tax plus National Insurance on the sacrificed salary — and pay only 4% BIK tax (2026/27) on a car that would otherwise cost them far more to run from after-tax pay. Many employers pass their own NIC saving (13.8%) on to employees as an extra contribution toward the lease cost. See our dedicated EV salary sacrifice guide for step-by-step worked examples.
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 | £27,800 (frozen) |
| Tax calculation | £27,800 × BIK % × tax rate | Same formula |
| Example: 28% BIK, 40% taxpayer | £27,800 × 28% × 40% = £3,114/year | Same at frozen rate |
Tip: Unless you do significant private mileage, the fuel benefit is often not worth it — consider opting out and paying for your own fuel. The maths rarely stacks up: a higher-rate taxpayer with a 28% BIK car pays £3,114/year for the fuel benefit, which buys roughly 3,900 miles of private petrol at current prices. Very few drivers use that much private mileage at the employer’s expense.
Your P11D
The P11D is the form your employer uses to report the taxable value of any benefits in kind — including your company car — to HMRC. See our full P11D guide for a complete breakdown of how benefits are valued and reported.
| 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 |
Related Guides
- Employee Benefits & Tax UK 2026/27 — Hub
- Company Car vs Car Allowance UK 2026/27 — Which Is Better?
- Company Car Tax (BIK) Rates 2027/28
- P11D Benefits in Kind — How Are Employee Perks Taxed?
- EV Salary Sacrifice UK 2026/27
- Salary Sacrifice Guide UK
- Mileage Allowance Rates UK
- Tax Codes Explained
- Electric Car Costs UK
- Car Costs UK 2026 — Running Costs and Finance Options
- Cost to Run a Car UK 2026
- Self Assessment Tax Return Guide
- How to Read Your Payslip
- Car Finance Guide UK