Providing a company car is a sought-after employee benefit. However, when offering any employee benefit which has a monetary value, it must be declared to HMRC, as your employees are required to pay tax on that benefit. It’s important for both the business and your employees for company car tax to be paid correctly to avoid any financial penalties.
In this guide, we explain everything you need to know about company car tax, including calculations, and practical considerations for fleet managers.
If you’re a UK-based business looking for a full fleet solution to help you manage your fleet, take a look at our Business Fleets page to see how we can help.
How does company car tax work
Your employees will pay tax on their company car benefit via Paye as You Earn (PAYE). Their tax code will be adjusted according to the type of car and its value, and as the employer, you’ll collect this tax and pay it to HMRC every month.
Fleet managers will need to have a good knowledge of Benefit-in-Kind (BiK) tax or company car tax (as it’s also known), P11D values and reporting, as well as how fuel types and different ways to deliver an employee car benefit can impact company car tax.
Benefit-in-Kind (BiK)
Benefit-in-Kind is a type of tax that employees pay on any benefit they receive as part of their employment that isn’t salary, whether that be private healthcare, support with childcare costs, a loan or a company car.
P11D
The P11D value refers specifically to the P11D car value, being the list price including VAT and delivery charges, but excluding first registration fees and annual road tax. This figure is required to calculate the amount of BiK tax your employees need to pay for their car benefit.
The BiK tax calculation explained
As the employer, you’re responsible for informing HMRC of any benefits you provide to your employees on top of their salary. Each year before July, you’ll need to complete a P11D form for every employee who receives a company car benefit. Alternatively, you can choose to report taxable benefits via the Pay as You Earn (PAYE) scheme. The latter will become the mandatory way for reporting benefits from 6 April 2027.
A car’s CO2 emissions determine the ‘appropriate percentage’ rate, which can then be used to calculate how much BiK tax would be on any given company car, a table including these rates can be found below. To complete the calculation, the P11D value of the car is also required. The sum to work out how much BiK tax is due is:
P11D value x BIK percentage rate = cash equivalent of the benefit
The employee pays tax on this amount depending on their marginal rate of tax so you can multiply this by 20%/40%. As the employer, you’re required to pay Class 1A National Insurance Contributions (NICs) on any car benefits you provide – the amount depends on the cash equivalent of the benefit.
Role of the P11D form
UK businesses that provide benefits to their employees are required to file a P11D form in line with the P11D submission deadline, which is always 6 July for the previous tax year.
On the P11D form itself, for company cars, you’ll be asked to complete the following details for all employees: the make and model of the car, the registration date, the CO2 emissions, the engine size, the fuel type, the list price of the car and any accessories added.
If applicable, you’ll also need to state the amount of private fuel benefit, and include any contributions made by your employees for private use, accessories or fuel.
BiK tax bands
Following the implementation of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP), all new cars registered after 6 April 2020 are emission tested using this method to determine the appropriate BiK percentage rate.
As we start to transition to electric cars, current BiK rates for Electric Vehicles (EVs) are currently low, just 3%, which is an incentive to get businesses to take steps towards an EV fleet. The 3% rate is fixed until 2026, and won’t increase above 5% until after 2028.
Read our blog: Tax Changes from April 2025 to find out more information about the current company car tax rates
Impact of fuel type
With the low BiK rate for EVs, which is just 3% until 2026, increasing by 1% each year until 2028, electric cars are cost-efficient vehicles when chosen as company cars, particularly when delivered via a salary sacrifice. You can choose whether your employees simply pay the 3% BiK for their electric car, or whether they pay towards the cost of the vehicle via a gross salary deduction, with tax and National Insurance savings for both you and them.
To learn more about the impact fuel type can have on company car tax, read our Complete Guide to BIK.
Considerations for fleet managers
There are many things to consider when running a fleet of company cars and considering the tax implications for your fleet. You might need to think about selecting fuel-efficient vehicles, using an online BiK calculator to assess the tax implications of various car options and the best methods for delivering a company car benefit.
Selecting fuel-efficient vehicles
Fully Electric Vehicles which produce zero CO2 emissions come with a BiK tax rate of 3% currently, and the Government has advised this won’t increase beyond 5% until at least 2028.
However, for Hybrid Electric Vehicles including plug-ins or self-charging, these fall within the band of 1 and 50g/km CO2 emissions. This band has five BiK rates based on the distance a car can travel using electricity only.
The current CO2 emission band BiK rates for hybrids:
– More than 129 miles of electric – 3% BiK rate
– 70-129 miles of electric – 6% BiK rate
– 40-69 miles of electric – 9% BiK rate
– 30-39 miles of electric – 13% BiK rate
– 30 miles of electric – 15% BiK rate
The UK Government has announced it plans to introduce new legislation aimed at mitigating the impact of stricter emissions testing on company car tax for Plug-in Hybrid Electric Vehicles (PHEVs) introduced in January 2025. To find out more read our blog: Plug-in Hybrid Company Car Tax – Is it Still Increasing?
Choosing a fleet of vehicles with the lowest CO2 emissions will reduce the amount of BiK tax your employees pay, but equally, the cars also need to work for your business.
Online BiK calculators: find out how much company car tax is
There isn’t a one size fits all when it comes to company cars, you could have employees in different tax brackets, different conditions around who has access to which makes and models, and potentially even different methods for providing a car benefit.
Perhaps the best way to work out the BiK implication for each driver population is to use a BiK calculator to determine how much BiK tax your employees have to pay, which can also help you to understand how much the fleet might cost the business.
Employee selection criteria
The requirements for your company car entitled drivers could influence your fleet. For example, high mileage drivers might be better off in a Hybrid Electric Vehicle, so they have the back-up of an alternative fuel when they’re travelling long distances – but with a hybrid, your employees pay more BiK tax than a fully electric car.
If you have fleet drivers who mainly use their cars for commuting and personal use and/or you’re sustainability conscious, then a Battery Electric Vehicle could be the best option, offering the lowest possible BiK tax rate.
Whatever you choose, if you implement a CBS car scheme, we can help you determine a payment for each company car – that could be more than the equivalent BiK rate – to make it fair for your employees across the board and benefit the business too.
Salary sacrifice schemes
A salary sacrifice car scheme is an efficient arrangement that reduces the net monthly cost of a company vehicle for your employees. They sacrifice a fixed amount from their gross salary in exchange for a company car and as a result they pay less income tax and NICs. With their taxable salary amount reduced, you also pay less Class 1 NICs.
This type of employee car benefit is classed as a company car though, and therefore the appropriate tax for the benefit is applicable. For your employees, this is BiK tax, but with the low BiK rate for EVs at present, this is a minimal amount. Class 1A NICs for you as the employer are also payable.
To learn more about the tax efficiencies of salary sacrifice, read our What is a Salary Sacrifice Car Scheme guide.
Electric vs. hybrid fleets
For different types of electric cars, there are different BiK rates. For hybrid vehicles that still use some form of traditional fuel, such as petrol or diesel, alongside electric, the BiK rates are higher because they produce more CO2 emissions when the car is running on traditional fuel.
The most cost-efficient BiK rates are for full EV, which is an incentive set by the Government to help make the move to electric more appealing.
To learn more about the differences between electric cars and their BiK impact, read our blog: Hybrid vs Electric Cars: What’s Right For Your Fleet.
Keeping up-to-date and minimising tax liability
Although the Government has released the BiK rates for EVs up to 2028, there’s still a chance that changes could be made.
To stay up-to-date with tax liability, it could be beneficial to seek professional advice on structuring a tax-efficient company car scheme.
Full EVs continue to offer the lowest BiK tax rates compared to other fuel types, making them the most tax-efficient choice for both employers and employees. With BiK rates for EVs remaining low and fixed for the next few years, businesses can benefit from reduced NICs, while employees enjoy lower personal tax liabilities. This long-term stability in EV taxation, combined with ongoing Government incentives, means EVs are a financially advantageous option for company car schemes and salary sacrifice arrangements.
Company car solutions from CBS
Don’t underestimate the importance of understanding company car tax implications for your employee car benefits.
If you’re looking for a fleet partner that can help you navigate company car tax regulations and create cost-effective fleet solutions, get in touch with us today.