Company cars are a popular way to incentivise employees and company directors, however the tax on cars is complicated.
If you are considering ordering a car through your limited company, or the company you work for and want to know more about the tax consequences, then this article is for you. The tax discussed will apply if you or your family use the car privately (which includes commuting).
Broadly speaking, providing a car is considered a benefit-in-kind (BIK) in the eyes of HMRC. This means you will have to pay income tax on the BIK received.
How is the BIK calculated? The formula is:
Value of the car (for BIK purposes) x BIK Rate (expressed as a percentage) = Value of the Taxable Benefit
Here’s an example for illustrative purposes:
£50,000 x 10% = £5,000 (the amount you pay income tax on)
In our example above, if the applicable BIK rate for this £50k was 10%, then a 40% taxpayer would pay £2,000 of income tax.
Let’s break this down further
The value of the car is the list price of the car, including VAT, plus any extras/accessories, less any qualifying capital contributions made by the employee.
The benefit in kind rate is (mostly) based on the CO2 emissions. For ultra-low emission vehicles (typically hybrids), the electric mileage range is also relevant. The higher the electric the mileage range, the lower the BIK rate.
The BIK rates are shown at HMRC’s website here:
Types of cars
Instead of getting drawn into the detail, it is often easier to split these categories by type of car, because they align well with the underlying emission and electric range criteria:
- Fully electric – BIK rate at 4% for the tax year 2026/2027
- Ultra Low emission vehicles (normally plug-in hybrids), with CO2 emissions of 50g/km or less. BIK rate varies from 4% – 16% for the tax year 2026/2027, subject to the electric mileage range.
- Petrol/Hybrid vehicles with CO2 emissions at and above 51 grams per km – BIK rate varies from 17% – 37% for the tax year 2026/2027
Once the taxable value of the car has been calculated, it will depend on your income tax rate, how much tax you will pay on this benefit.
Some examples for illustration purposes:
We worked out that taxable value (a.k.a. cash equivalent of the benefit) is £5,000 above.
Therefore, a 40% taxpayer, will pay income tax of:
£5,000 X 40% = £2,000
Whereas a 20% taxpayer will pay:
£5,000 x 20% = £1,000
If we then compare and contrast an electric car with a petrol car, it becomes very evident why electric cars are so popular. Let’s assume the value of the car is £25,000 and the person pays 40% income tax.
If the car is electric and has nil CO2 emissions, the income tax will be:
£25,000 x 4% = £1,000 (Taxable Value of the car)
£1,000 x 40% = £400 (Income Tax)
If the car is petrol powered and has CO2 emissions 99g/km, the BIK is 25% (whereas the electric car was 4%)
£25,000 x 25% = £6,250 (Taxable Value of the car)
£6,250 x 40% = £2,500 (Income Tax)
Some final points
The zero-emission BIK rate is currently 4% for 2026/2027. However, under the currently published rates, this will increase to 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30.
There may also be a separate taxable benefit where an employer pays for fuel used for private journeys. Worth noting that electricity is not treated as fuel for the company car benefit charge.
At SAS, we help business owners with their company cars and many other tax issues
Get in touch to discuss your questions.
Author notes
Written by Sean Hackemann, Director of Specialist Accounting Solutions. Team SAS provides virtual finance teams support, company accounts & tax and advisory services.
Disclaimer: This article is intended to provide a quick reference to the current tax regulations for drivers of company cars and employers. The content has been provided for informational purposes only, does not constitute tax advice and should not be relied on to cover specific situations or circumstances or as a substitute for professional advice.
