What Is Company Car Tax?
When your employer provides you with a company car that you can also use privately, HMRC treats the private use as a taxable benefit — a Benefit in Kind (BIK). You pay income tax on the BIK value each year. Your employer also pays Class 1A National Insurance on the same value.
Company car tax is not deducted from your payslip like PAYE — instead, HMRC adjusts your tax code to collect the liability throughout the year, or you declare it on a Self Assessment return.
How Is BIK Calculated?
The formula is straightforward:
BIK value = P11D value × BIK%
Annual tax = BIK value × your income tax rate
The P11D value is the manufacturer's list price including factory options and delivery — not the price you or your employer actually paid. The BIK% comes from HMRC's CO2 table, updated each tax year.
Example
A petrol car with a P11D value of £32,000 and CO2 emissions of 120g/km attracts a BIK rate of 31% in 2026/27:
- BIK value = £32,000 × 31% = £9,920
- Basic rate (20%) taxpayer pays: £9,920 × 20% = £1,984/year (£165/month)
- Higher rate (40%) taxpayer pays: £9,920 × 40% = £3,968/year (£331/month)
BIK Rates 2026/27
| CO2 (g/km) | Petrol BIK % | Diesel BIK % (RDE2) | Diesel (non-RDE2) |
|---|---|---|---|
| 0 (pure electric) | 4 | — | — |
| 1–50 (PHEV ≥130mi) | 5 | — | — |
| 1–50 (PHEV 70–129mi) | 8 | — | — |
| 1–50 (PHEV 40–69mi) | 12 | — | — |
| 1–50 (PHEV <40mi) | 17 | — | — |
| 51–75 | 17 | 17 | 21 |
| 76–94 | 19–24 | 19–24 | 23–28 |
| 95–114 | 25–29 | 25–29 | 29–33 |
| 115–134 | 30–33 | 30–33 | 34–37 |
| 135–154 | 34–37 | 34–37 | 37 |
| 155+ | 37 (max) | 37 (max) | 37 (max) |
Within each 5g/km band, the BIK% increases by 1% per band. The diesel surcharge adds 4% for non-RDE2 cars up to a maximum of 37%.
The Case for Electric Company Cars
At just 4% BIK in 2026/27, a pure electric company car is extraordinarily tax-efficient compared to petrol or diesel alternatives. A £45,000 EV costs a higher rate taxpayer just £720/year in BIK tax — versus £5,400–£6,660/year for a comparable petrol car at 30–37% BIK.
The rates will rise — 5% in 2027/28, 6% in 2028/29 — but will remain far below petrol/diesel rates for the foreseeable future. If you're considering a company car, an EV almost always wins on tax alone.
Employers also benefit: they pay only 13.8% Class 1A NI on the low EV BIK value, rather than the much higher NI on a cash car allowance.
Employer Class 1A NI
In addition to your personal tax, your employer pays Class 1A National Insurance at 13.8% on the BIK value of the company car. This is a company cost, not yours — but worth being aware of as it factors into your employer's decision about whether to offer a company car at all.
Company Car vs Car Allowance
A car allowance is paid as cash salary — it's subject to income tax and National Insurance at the normal rates. A company car is taxed at BIK rates, which for low-emission vehicles are much lower.
| Factor | Company Car | Car Allowance |
|---|---|---|
| Taxation | BIK rate × income tax | Full income tax + NI |
| Best for | Electric cars | High-CO2 petrol/diesel |
| Mileage claims | HMRC advisory rates (lower) | Full AMAP rates (45p/25p) |
| Ownership | Company owns car | You own/lease the car |
| Flexibility | Limited to company policy | Choose your own car |