How does company car tax work?

Interested in a company car and want to know how taxing it works? This handy guide tells all.

A company car is treated as a job benefit, which means it’s subject to a Benefit-in-Kind (BiK) charge. This means you’ll need to pay company car tax if you use the vehicle for personal reasons, including commuting.

But how does company car tax actually work, and how much will you pay? This guide explains everything you need to know, plus recent changes to recommended mileage payments.

Remember, you can buy a brand new or used car right here on Carwow. And you can sell your car, too. We’re here to help you through every step of your car-changing journey.

What do different company car tax terms mean?

Before we begin, it’s worth knowing a bit of lingo related to company car tax:

• P11D value: The official taxable value of the car, including VAT and options.
• CO2: Carbon dioxide emissions produced by your car, measured in grams per kilometre, expressed as g/km.
• BiK: Benefit-in-Kind is a taxable perk outside your normal salary – a company car falls under this.
• BiK rate: The percentage of a car’s value that’s taxable. These are determined by a car’s CO2 emissions (in g/km) and range, and are set on a sliding scale ranging from 2% to 37%.

Company car tax explained

A company car is usually treated as a Benefit-in-Kind (BiK) because it has personal value if you can use it outside work. The taxable value is based on the car’s P11D value multiplied by a BiK percentage, which depends mainly on CO2 emissions and, for hybrids, electric-only range.

That taxable benefit is then taxed at your personal income tax rate (20%, 40% or 45%), and the cost is usually collected through PAYE.

For example, if a car had a £40,000 P11D value and a 25% BiK rate, the taxable benefit would be £10,000. A 20% taxpayer would pay £2,000 per year, while a 40% taxpayer would pay £4,000.

The exact BiK percentage changes each tax year, and reductions only apply in specific cases such as employee capital contributions or periods when the car is unavailable for private use.

Company car tax bands

BiK rates often change with each financial year, although the government typically publishes these well in advance.

The higher the CO2 emissions of a car, the higher its BiK will be. Equally, hybrid cars with a decent electric range will have a lower BiK rate.

Note that there will be a year-on-year increase on the percentage you pay BIK on, which will increase until tax year 2029/2030.

Here are the current tax bands (scroll to the right across the table to see later financial years, and down to see higher BiK percentages):

CO₂ (g/km)	Electric range (miles)	2025/26 (%)	2026/27 (%)	2027/28 (%)	2028/29 (%)	2029/30 (%)
0	N/A	3	4	5	7	9
1-50	>130	3	4	5	18	19
1-50	70-129	6	7	8	18	19
1-50	40-69	9	10	11	18	19
1-50	30-39	13	14	15	18	19
1-50	<30	15	16	17	18	19
51-54	–	16	17	18	19	20
55-59	–	17	18	19	20	21
60-64	–	18	19	20	21	22
65-69	–	19	20	21	22	23
70-74	–	20	21	21	22	23
75-79	–	21	21	21	22	23
80-84	–	22	22	22	23	24
85-89	–	23	23	23	24	25
90-94	–	24	24	24	25	26
95-99	–	25	25	25	26	27
100-104	–	26	26	26	27	28
105-109	–	27	27	27	28	29
110-114	–	28	28	28	29	30
115-119	–	29	29	29	30	31
120-124	–	30	30	30	31	32
125-129	–	31	31	31	32	33
130-134	–	32	32	32	33	34
135-139	–	33	33	33	34	35
140-144	–	34	34	34	35	36
145-149	–	35	35	35	36	37
150-154	–	36	36	36	37	38
155-159	–	37	37	37	38	39
160-164	–	37	37	37	38	39
165-169	–	37	37	37	38	39
170+	–	37	37	37	38	39

How to calculate your company car tax

Here are three easy steps to calculate your tax:

1. Find your P11D: This is the car’s UK list price, including VAT, delivery fees, and any optional extras.
2. Apply the BIK rate: Multiply the P11D value by the percentage from the table above.
3. Apply your income tax rate: Multiply the resulting figure by your income tax rate (for example, 20% for basic rate, 40% for higher rate taxpayers) to get your annual tax bill.

Let’s use an entry-level Renault 5 as an example:

• P11D value: £21,430
• BiK rate: 3%
• Income tax rate: 20%

Taxable value = £21,430 x 3% = £642.90
Annual tax due = £642.90 x 20% = £128.58 per year (£10.72 per month)

Can I reduce my company car tax?

Yes, you can reduce company car tax by choosing your vehicle carefully – though not once you’ve already signed an agreement.

Electric cars attract the lowest BiK rates, so they’re the cheapest from a tax perspective. Plug-in hybrids with good electric range are also tax-efficient options.

If you need petrol or diesel, lower CO2 emissions will generally mean lower tax. Be aware that optional extras, such as larger alloy wheels, can sometimes increase CO2 and push up your tax bill.

The car’s P11D value also matters: the higher the value, the more tax you’ll pay.

The only other factor is your income tax band, which isn’t something most people can (or should) change just to reduce company car tax.

Do I have to pay tax on company car fuel?

If your employer pays for fuel used for private journeys in your company car (including commuting), you may have to pay a Fuel Benefit Charge.

This is a separate BiK tax calculated using a Government-set fixed annual value, multiplied by your car’s BiK percentage. This means the more polluting the car, the higher the charge is likely to be.

Because the calculation can be complex, most drivers use the HMRC online tool or their employer’s payroll team to estimate the cost.

If you do not receive free private fuel from your employer, there is no fuel benefit charge to pay.

Fully electric company cars do not attract a fuel benefit charge.

What about mileage payments on company cars?

Mileage payments for employees can be made tax- and NIC-free within HMRC-approved limits. These apply differently depending on whether the employee uses their own vehicle or a company car.

For company cars, employers can reimburse fuel or energy costs using Advisory Fuel Rates (AFRs), which are also set by HMRC and reviewed quarterly, when you use a company car for business purposes.

HMRC has recently increased the typical AFR for company car users. So, as of 1 June 2026:

• Small petrol cars: 14p per mile
• Medium petrol cars: 17p per mile
• Larger petrol cars (over 2.0 litres): 26p per mile
• Diesel rates: These vary but broadly follow similar increases by engine size
• Electric cars: No change to current rate, which is 7p per mile for home charging and 15p per mile for public charging

These rates are usually used when employers reimburse employees for business mileage in company cars, helping ensure payments remain tax-efficient.

If you use your own car for business travel, you can now claim 55p per mile for the first 10,000 business miles in a tax year. HMRC recently increased the Approved Mileage Allowance Payments (AMAPs) rate by 10p per mile, backdated to the start of the 2026/27 tax year. Any business mileage over 10,000 miles remains claimable at 25p per mile.

Company car tax FAQs

Do hybrid and electric cars keep company car tax down?

The lower a car’s CO2 emissions, the less you’ll pay in company car tax. As a result, hybrid and electric cars are among the cheapest.

Has the cost of company car tax increased?

Company car BiK rates have marginally increased for some bands for the 2026-27 financial year.

Company car tax rates do change from time to time, though the government publishes this info well in advance.

Can I claim tax relief on my company car’s mileage?

Yes, you can claim tax relief on a company car’s mileage, but only on the fuel or electricity costs for qualifying business trips.

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Looking for a new set of wheels? With Carwow you can sell your car quickly and for a fair price – as well as find great offers on your next one. Whether you’re looking to buy a car brand new, are after something used or you want to explore car leasing options, Carwow is your one stop shop for new car deals.

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