Company Car Tax Explained

A company car available for private use is a taxable benefit in kind. The taxable value is the car’s P11D list price multiplied by an appropriate percentage set by its CO2 emissions, so a cleaner car produces a smaller benefit. The employee pays Income Tax on that figure and the employer pays Class 1A National Insurance. Fully electric cars carry a very low percentage, which is why they remain one of the most tax efficient benefits an employer can offer.

Providing a car through the business is one of the most common benefits an employer offers, and one of the most misunderstood. The tax depends far more on the car’s emissions than on its price, which is why an expensive electric car can cost a driver less in tax than a cheaper petrol one. This guide explains how the charge is worked out, how the fuel benefit adds to it, and why electric company cars are so tax efficient.

How is company car tax calculated?

The taxable benefit is worked out in two parts. First you take the car’s P11D value, which is broadly the manufacturer’s list price including VAT, delivery and most optional extras, adjusted for any capital contribution the employee makes. Second you multiply that value by an appropriate percentage set by the car’s CO2 emissions figure. The result is the taxable benefit for the year.

For example, a car with a P11D value of £40,000 and an appropriate percentage of 25% produces a taxable benefit of £10,000. That £10,000 is the amount HMRC treats as extra income for the driver and as a reportable benefit for the employer.

What is the appropriate percentage?

The appropriate percentage rises as emissions rise. Zero emission cars sit at the bottom of the scale and the percentage climbs band by band as CO2 output increases, up to a maximum cap of 37% for the most polluting vehicles. Cars registered from April 2020 are measured under the newer WLTP testing standard, and plug in hybrids in the 1 to 50 grams per kilometre range are split further by how many miles they can travel on electric power alone, so a hybrid with a longer electric range attracts a lower percentage.

Because the percentages are set by government and change every tax year, always check the current figure for your exact car before you calculate anything. Diesel cars that do not meet the RDE2 standard also carry a 4% supplement, capped so the total never exceeds 37%.

What is the company car tax rate for electric cars?

Fully electric cars have a very low appropriate percentage that is scheduled to rise gradually. For the 2025/26 tax year the rate for a zero emission car is 3%. For 2026/27 it rises to 4%, and it is set to increase by a further percentage point in each of the following years. Even with these planned increases, an electric company car remains far cheaper to run through payroll than a petrol or diesel equivalent.

Using our earlier example, a £40,000 electric car at 3% produces a taxable benefit of just £1,200 in 2025/26, against £10,000 for a car taxed at 25%. The saving flows to both the driver, who pays Income Tax on a much smaller figure, and the employer, whose National Insurance bill falls in proportion.

How does the car fuel benefit charge work?

A separate charge applies when the employer pays for fuel used privately in a company car. Rather than measuring your actual private mileage, HMRC applies a fixed multiplier and multiplies it by the same appropriate percentage used for the car itself. The multiplier is £28,200 for 2025/26 and rises to £29,200 for 2026/27.

So a car with an appropriate percentage of 25% generates a fuel benefit of £7,050 in 2025/26 (25% of £28,200). This charge often costs more in tax than the private fuel is actually worth, so many drivers choose to repay the cost of private fuel to the employer instead, which removes the charge entirely. There is no fuel benefit charge for electricity, so charging an electric company car does not create this extra cost. Where an employee uses their own car for business, the separate mileage allowance (AMAP) rules apply instead.

How is the benefit reported and taxed?

The company car and any fuel benefit are reported to HMRC on form P11D after the end of the tax year, unless the employer has registered to payroll the benefit in real time. The employer then pays Class 1A National Insurance on the total taxable value of the benefit at the Class 1A rate.

The driver pays Income Tax on the benefit at their marginal rate, usually collected through an adjustment to their tax code so that a little more tax is taken from each month’s salary. A higher rate taxpayer therefore pays 40% of the taxable benefit in tax, while the employer’s cost is the Class 1A National Insurance on top. Getting the P11D value, the appropriate percentage and the reporting deadline right matters, because errors in benefit reporting are a frequent trigger for HMRC enquiries.

Why are electric company cars tax efficient?

The appeal comes from stacking several savings together. The low appropriate percentage keeps the taxable benefit small, there is no private fuel charge on electricity, and the company can usually claim generous capital allowances on the purchase. For an owner manager weighing how to extract value from the business, an electric car can be more efficient than taking extra salary or dividends. If you are comparing routes, our guide on salary versus dividends sets out the wider picture, and you can find related topics through our accountancy and tax guide.

Company car and benefit in kind reporting is a common HMRC compliance check area, and a single overlooked figure on a P11D can open a wider enquiry. A Solar Protect tax investigation policy covers up to £100,000 of your accountant’s fees with no excess, so a review of your car benefits is handled without an unexpected bill. Get a quote to protect your business today.

Reviewed by Matthew Bartlett, Director, Solar Protect. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.