How does company car tax work?

February 16, 2023 by

Company car tax is something you’ll need to pay if you’re using a company car privately, including commuting.

A company car is considered a perk of a job for tax purposes, so is subject to a ‘Benefit-in-Kind’ (BiK) rate.

But how does company car tax work, and how much will you need to pay? This guide explains.

Be sure to check out our rundown of the best company cars, and if you’re wondering about the company car tax implications for electric cars, we’ve got a dedicated guide to that topic as well.

What do different company car tax terms mean?

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

  • P11D value – this is the 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, a taxable perk outside of your normal salary; a company car is a Benefit-in-Kind
  • BiK rate – the percentage of a car’s value that is taxable. BiK rates are determined by how many g/km of CO2 a car emits, and are set on a sliding scale ranging from 2% to 37%

Company car tax explained

If your employer offers you a company car, it is providing something worth tens of thousands of pounds to you, typically with servicing and insurance included. This, clearly, is a nice thing: you may have be given a company car because you need to travel regularly for work, but it is likely that you will also be able to use the car in your personal life, potentially removing the need for you to have your own car.

Understandably, the taxman sees this as a ‘benefit in kind’, defined as something that is not “wholly, exclusively and necessary” for the business. Hence, a company car is subject to Benefit-in-Kind (BiK) taxation.

The amount of company car tax you’ll pay will be determined by its BiK rate, which is determined by the car’s CO2 emissions (as well as its electric range if it’s a hybrid) and expressed as a percentage of the car’s value. What tax bracket your earnings put you in then determine the amount of company car tax you will pay.

If you only use the car part-time or pay towards its cost, the amount of tax you pay will be reduced.

For example, if a car with a £40,000 P11D value emits 100-104g/km of CO2, it attract a 25% BiK rate. The taxable BiK amount will be 25% of £40,000, or £10,000.

To work out how much you’ll then pay, you then multiply this by your tax band: so a 20% rate payer would pay 20% of that £10,000 (£2,000, spread across the financial year), while a 40% rate taxpayer would pay £4,000. This tax is taken directly from your gross salary.

What’s included in a company car tax calculation?

A company car tax calculation us made up of four key components.

  1. The cost of the car, expressed as its P11D value
  2. The car’s CO2 emissions (plus battery range if applicable)
  3. The car’s BiK rate, determined by its CO2 emissions and expressed as a percentage
  4. Your personal tax bracket

You can determine the amount of tax you will pay each year by working through those four steps in the order they are set out above.

Company car tax bands

BiK rates often change with each financial year (FY), though the Government does publish changes well in advance.

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

Note that BiK rates are the same from FY 2022/23 to 2024/25, increasing in 2025/26 (scroll to the right across the table to see later FYs, and down to see higher BiK percentages).

CO2 emissions (g/km) Electric range (miles) BiK 22/23, 23/24, 24/45  BiK rate FY 2025/26 
0 (electric cars) NA 2 3
1-50 130+ 2 3
1-50 70-129 5 6
1-50 40-69 8 9
1-50 30-39 12 13
1-50 Less than 30 14 15
51-54 15 16
55-59 16 17
60-64 17 18
65-69 18 19
70-74 19 20
75-79 20 21
80-84 21 22
85-89 22 23
90-94 23 24
95-99 24 25
100-104 25 26
105-109 26 27
110-114 27 28
115-119 28 29
120-124 29 30
125-129 30 31
130-134 31 32
135-139 32 33
140-144 33 34
145-149 34 35
150-154 35 36
155-159 36 37
160-164 37 37
165-169 37
170+ 37

Can I reduce my company car tax?

Yes, you absolutely can – though not when you’re in the middle of an agreement: being tactical with the car you choose is key.

Electric cars attract the lowest BiK rates, and are therefore taxed at the lowest percentage rate, while choosing a plug-in hybrid with a decent electric range will also help keep the bills down.

If you need a petrol or diesel car, keeping a close eye on the differing CO2 emissions different engines produce will help minimise your liabilities, while bear in mind that some optional extras such as large alloy wheels can increase how much CO2 a car produces.

Also keep an eye on the car’s P11D price, as the higher the value of the car, the more tax it will attract.

Some car companies offer trim levels that are specifically designed for company car drivers, providing just the right amount of equipment while keeping the P11D down, and pairing this with a low CO2 engine.

The only other variable you can have an impact on is your tax bracket, but we’d wager that asking for a pay cut to drop you into a lower tax bracket would hardly by wise or economically viable…

Do I have to pay tax on company car fuel?

If your company pays for any of the fuel you use for your company car – regardless of it it does so just for business driving or commuting – you will be liable to pay Fuel Benefit tax. This is calculated based on the average cost of a company car, as set each year by the Government, with the BiK rate your company car attracts also being used in the calculations, alongside a number of other variables.

As such Fuel Benefit is a complex tax to work out, so we advise you use the Government’s online Fuel Benefit calculator to determine your likely liabilities.

Note that electric cars do not attract this tax.

FAQs: Company car tax

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 2021-22 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?

You can claim tax relief on the fuel or electricity used to power your car, as well as road tax, MOTs and any necessary repairs.