Rajan Wilcox
Company car tax is a tax paid by employers and employees on company cars for private use. The tax is based on several factors, including the vehicle's list price, CO2 emissions, and the type of fuel used. HMRC classifies company cars as Benefit-in-Kind (BIK), and the tax rates vary depending on the vehicle's characteristics and the employee's income. Employers and employees can use online calculators to estimate the company car tax and fuel benefits tax owed to HMRC.
Company Car and Fuel Tax Characteristics and Values
| Characteristics | Values |
|---|---|
| Taxable value | Calculated using commercial payroll software or HMRC's company car and car fuel benefit calculator |
| Benefit-in-Kind (BIK) | Tax paid by employers and employees on company cars |
| Advisory Fuel Rates (AFRs) | Published by HMRC |
| Plug-in hybrid vehicles (PHEVs) | Lower BIK rates than traditional fuel cars |
| Electric vehicles (EVs) | Lowest BIK rates; from April 2025, BIK tax rate will increase by 1% per year over a three-year period |
| Ultra-low emission vehicles (ULEVs) | BIK tax rates will increase |
| Low-emission vehicles | May result in lower BIK tax |
| Vehicle value | Higher value may result in higher tax |
| Income | Higher income may result in higher tax |
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What You'll Learn
Calculating taxable value
As an employer, if you provide company cars or fuel for your employees' private use, you'll need to calculate the taxable value and report it to HM Revenue and Customs (HMRC). The taxable value of a car is not the same as its cost price. It depends on factors like the amount of time the car is unavailable during the tax year (for instance, due to a mechanical fault).
You can calculate the taxable value using commercial payroll software or HMRC's company car and car fuel benefit calculator. If you use the latter, you'll need to select the fuel type: 'F' for diesel cars that meet the Euro 6d standard (also known as Real Driving Emissions 2), 'D' for other diesel cars, and 'A' for all other cars. You can check a car's CO2 emissions. For electric cars and other cars with an approved CO2 emissions figure of 75g/km or less, answer 'no' to the question 'is the car provided via an optional remuneration arrangement?'. If your car has an approved CO2 emissions figure of 1 to 50g/km, you'll also need to fill in the 'zero-emission mileage' box, which is the distance the car can go on electric power before its batteries need recharging. You can find your zero-emission mileage figure on your vehicle's certificate of conformity, if you own the car.
Additionally, you can work out the taxable value manually on P11D working sheet 2. Alternatively, you can use an online company car tax calculator, which will calculate the benefit-in-kind and other figures using HMRC rates. These calculations are based on CO2 emissions, fuel, and taxable price. It's important to note that different rules apply according to the type of fuel used, and rates may fluctuate over different tax years. HMRC regularly publishes new Advisory Fuel Rates (AFRs) and Advisory Electric Rates (AERs) to help you stay up to date.
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Benefit-in-Kind (BIK) tax
If you have a company car, you will need to pay Benefit-in-Kind (BiK) tax on it. This is because HMRC considers a company car to be a benefit-in-kind, or a valuable perk over and above your salary, which is why you have to pay tax on it. Your employer will deduct any company car tax due to HMRC at the source.
The BiK tax rate system penalises cars that produce lots of emissions. The more a car pollutes, the more tax you will pay. On the other hand, the cleaner your car is, the less tax you will pay. Hybrid and electric cars are much cleaner than petrol and diesel. Electric cars, for example, are always taxed at the lowest rate.
The amount of BiK tax you will pay will be broken down into certain pay brackets, which consider the environmental impact of the vehicle and the P11D value of the car. The P11D value is the list price of the car with extras included as well as VAT, excluding the vehicle tax and first-year registration fee. The BiK tax rates are also determined in part by using the amount of CO2 emissions the car releases.
You can calculate the taxable value using commercial payroll software or HMRC's company car and car fuel benefit calculator.
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Advisory Fuel Rates (AFRs)
AFRs are designed to ensure that employees are reimbursed fairly for the cost of fuel when using their company car for business travel. They are also used to ensure that employees are not taxed on the benefit of using a company car for business travel. If the mileage rate paid does not exceed the AFR for the specific engine size and fuel type, no taxable profit will be incurred. Additionally, there will be no Class 1A National Insurance liability in such cases.
AFRs are also used to calculate the taxable value of company cars and fuel benefits for employers. Employers must report the taxable value to HMRC if they provide company cars or fuel for their employees' private use. The taxable value can be calculated using commercial payroll software or HMRC's company car and car fuel benefit calculator.
AFRs are calculated using current fuel prices and fuel efficiency levels across different engine sizes. For example, the advisory electricity rate for electric company car drivers is calculated based on an electrical efficiency of 3.57 miles per kilowatt-hour and domestic electricity costs of 25.24 pence per kilowatt-hour. This rate allows electric vehicle drivers to claim back fuel costs from their employers at a standardised rate.
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Vehicle emissions
In the UK, company car tax is based on the car's value, CO2 emissions, and the employee's income tax bracket. Employees do not pay National Insurance on benefits-in-kind, but employers do. The benefit-in-kind (BIK) rates for company cars are reviewed annually by the UK government and are subject to change. For the 2025 tax year, zero-emission cars will have a BIK rate of 3%, increasing to 4% for 2026/2027 and 5% for 2027/2028. Cars emitting 1-50 g/km of CO2 will have BIK rates ranging from 6% to 15%higher emissions (51-100 g/km) will face rates from 16% to 26%.
To promote the adoption of zero-emission vehicles, the UK has introduced incentives for electric and hybrid cars, which have lower BIK rates compared to traditional internal combustion engine (ICE) cars. This encourages both employees and employers to opt for greener company car schemes as less efficient cars are taxed at higher rates. Additionally, vehicles valued over £40,000 upon registration are subject to an 'expensive car supplement' for five years.
The HM Revenue and Customs (HMRC) department in the UK publishes Advisory Fuel Rates (AFRs) and Advisory Electric Rates (AERs) to assist in calculating the taxable value of company cars and fuel benefits. These rates are updated periodically, and employers can utilise commercial payroll software or HMRC's company car and car fuel benefit calculator to determine the taxable value.
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Income tax
If you have a company car, it is considered a benefit-in-kind (i.e., extra value on top of your salary), and so it is taxed like your salary. The taxable value of a car is not the same as its cost price. It depends on factors like the amount of time the car is unavailable during the tax year, its list price, and its CO2 emissions.
If you only use your company car for work, you just pay the benefit-in-kind tax and no vehicle excise duty. However, if you use your company car for any personal trips, you have to pay Vehicle Excise Duty (commonly referred to as 'car tax' or 'road tax') on it as well.
If your employer covers the cost of all fuel used by your company car, including personal journeys, you also pay tax on this benefit. This is calculated by adding 5.5 cents per personal use mile. If you drive a company car, you cannot claim a mileage allowance from HMRC, but you can claim fuel expenses for all business mileage where you have paid for the fuel.
As an employer, if you provide company cars or fuel for your employees' private use, you need to work out the taxable value so you can report this to HM Revenue and Customs (HMRC). 'Private use' includes employees' journeys between home and work, unless they are travelling to a temporary place of work.
From April 2025, the company car tax rates for electric vehicles (EVs) will gradually increase by 1% per year over a three-year period. This means the Benefit-in-Kind (BIK) tax rate for EVs will be 3% in the 2025/26 tax year, 4% in 2026/27, and 5% in 2027/28.
If the tax on a company car is too high, employers may consider offering a cash alternative to cover the cost of a personal car or a salary sacrifice car scheme.
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Frequently asked questions
Company car tax is calculated based on the car's value, CO2 emissions, and the taxable income of the employee. The higher the value of the car, the more tax is to be paid. The tax is also influenced by the type of fuel used and the vehicle's list price.
Opting for a low-emission vehicle, such as an electric or hybrid car, can reduce your company car tax. Additionally, choosing cars with lower values and minimising optional extras can also lower the tax payable.
From April 2025, the company car tax rates for electric vehicles (EVs) will increase by 1% per year over a three-year period. This means the BIK tax rate for EVs will be 3% in the 2025/26 tax year, 4% in 2026/27, and 5% in 2027/28.
BIK rates are reviewed annually by the UK government. Changes are typically announced in the Budget, allowing businesses and employees to plan accordingly.
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