Few benefits generate as many questions from directors and employees as the company car. It feels like a straightforward perk, but underneath sits a genuinely complex set of rules covering benefit-in-kind tax, capital allowances, VAT, and mileage. Get the structure right, and a company car can still be a tax-efficient way to reward yourself or your team, especially with an EV. Get it wrong, and it becomes an expensive and recurring liability. Here’s how it actually works.
The Basic Principle: Who Owns the Car Matters
The tax treatment depends entirely on whether the business owns or leases the car and makes it available for private use, or whether the individual owns the car and simply claims mileage for business journeys. These are two completely different systems, and mixing them up is one of the most common mistakes.
- Company-owned or leased car, available for private use → the employee pays tax on a Benefit-in-Kind (BIK), which the company reports on the P11D, and the company pays Class 1A National Insurance on that benefit.
- Employee’s own car, used for business trips → no BIK applies. Instead, the employee can claim tax-free mileage allowance from the company, or claim tax relief personally if the employer doesn’t reimburse in full.
If you try to claim both mileage allowance and company car, it will create a red flag with HMRC.
How the Company Car Charge Works
If you provide a company car to your employee and your employee uses the car for private purposes (including ordinary commuting), the employee pays income tax on a notional benefit, calculated as:
P11D value × appropriate BIK percentage × the employee’s income tax rate
The P11D value is the manufacturer’s list price when new, including VAT and any optional extras costing £100 or more, not what the company actually paid after any discount. CO2 emissions set the BIK percentage (and, for hybrids, electric-only range), and the company pays Class 1A NIC on the resulting benefit figure, currently at 15%.
Petrol and diesel cars sit on a sliding scale that runs up to 37% at the top end for the highest-emission vehicles. Diesel cars that don’t meet the RDE2 emissions standard attract an additional 4% surcharge, though HMRC still caps the total at 37%. Plug-in hybrids sit on a separate, lower scale that depends on their electric-only range. The further a PHEV can travel on battery alone, the lower the percentage, though the rules are changing from April 2028 so that HMRC taxes all PHEVs in the low-emission band the same, regardless of range.
If the company also pays for private fuel, there’s a second charge on top: HMRC fixes the charge regardless of actual private mileage, multiplied by the same BIK percentage as the car, then taxed at the employee’s rate. This catches people out because it applies even where fuel costs are modest, the charge is fixed regardless of actual private mileage, so for low-mileage drivers it’s often not worth the company paying for private fuel at all.
Indicative BIK bands, 2026/27
| Vehicle type | CO2 emissions | Appropriate % |
|---|---|---|
| Electric (zero emission) | 0 g/km | 4% |
| Plug-in hybrid, 130+ mile electric range | 1–50 g/km | 5% |
| Plug-in hybrid, 70–129 mile electric range | 1–50 g/km | 8% |
| Plug-in hybrid, under 30 mile electric range | 1–50 g/km | 17% |
| Petrol / RDE2 diesel | 51–54 g/km | 18% |
| Petrol / RDE2 diesel | 90–94 g/km | 25% |
| Petrol / RDE2 diesel | 155+ g/km | 37% (cap) |
| Non-RDE2 diesel | any of the above bands | +4%, capped at 37% |
These are illustrative. Hence, always check the exact percentage for the specific CO2 figure and tax year on GOV.UK before running payroll.
Why Electric Cars Have Become the Default Choice
HMRC taxes pure electric company cars far more lightly than anything else on the road. The BIK percentage for zero-emission vehicles sits in the low single figures. Because a fraction of the petrol or diesel equivalent, though it’s rising gradually year on year as government support for EV uptake is phased down. Even so, the gap is substantial: a director taking a £45,000 electric car through the company can pay only a few hundred pounds a year in personal tax, against several thousand for an equivalent petrol car.
On the company side, EVs also attract enhanced capital allowances in many cases, and HMRC generally doesn’t restrict corporation tax relief on lease payments the way it does for higher-emission cars. Combined with lower Class 1A NIC exposure for the employer, this is why EV salary sacrifice and EV company car schemes have become so popular with owner-managed businesses.
Worked comparison: £45,000 car, higher-rate (40%) taxpayer, 2026/27
| Electric (4% BIK) | Petrol, 155+ g/km (37% BIK) | |
|---|---|---|
| Taxable benefit (P11D × BIK%) | £1,800 | £16,650 |
| Employee income tax (40%) | £720/year | £6,660/year |
| Employer Class 1A NIC (15%) | £270/year | £2,498/year |
Figures are illustrative and depend on the exact P11D value, CO2 band, and confirmed rates for the relevant tax year.
Mileage Claims: A Different System Entirely
Where the employee uses their own car for business journeys, the tax-free mileage rates (Approved Mileage Allowance Payments, or AMAPs) are 45p per mile for the first 10,000 business miles in a tax year, and 25p per mile after that, with an extra 5p per mile if carrying a fellow employee as a business passenger. Pay above these rates and the employee pays tax on the excess; pay below them, and the employee can claim tax relief on the shortfall through their self-assessment return.
Where a company owns a car, mileage reimbursement works differently. The company can reimburse the employee for business fuel using HMRC’s published Advisory Fuel Rates, which HMRC updates quarterly and vary by engine size and fuel type (with a separate, lower pence-per-mile rate for electric cars). Paying more than the advisory rate without evidence of actual cost can itself create a taxable benefit.
Tax-free mileage rates (AMAPs) for employee’s own car
| Vehicle | First 10,000 business miles | Miles after 10,000 |
|---|---|---|
| Car or van | 45p per mile | 25p per mile |
| Motorcycle | 24p per mile | 24p per mile |
| Bicycle | 20p per mile | 20p per mile |
| Business passenger (extra, any vehicle) | +5p per mile | +5p per mile |
Pay above these rates and the excess is taxable on the employee; pay below them, and the employee can claim tax relief on the shortfall via self-assessment.
Practical Tips for Company Cars
- Model the whole-life cost, not just the sticker price. A cheaper petrol car can end up costing a higher-rate taxpayer far more in annual BIK than a pricier EV.
- Keep P11D values and CO2/range data on file for every company car, and update payroll promptly when a car changes. Mid-year changes are a common source of P11D errors.
- Review private fuel provision annually. For most drivers, reimbursing actual business mileage at the advisory rate is cheaper than the company covering all fuel and triggering the fuel benefit charge.
- Don’t let mileage claims and company car status get mixed up. Check which regime applies before any claim is processed.
Company Cars: Tax Traps to Watch
- Assuming an EV is automatically “tax-free.” It isn’t — the BIK charge is low, not zero, and it’s rising each year.
- Forgetting salary sacrifice interacts with Optional Remuneration Arrangement rules, which for most vehicles mean the BIK is based on the car’s value, not the salary given up — so the intended saving doesn’t always materialise.
- Treating a pool car as private-use-free without meeting the strict conditions (available to, and used by, more than one employee, not normally kept overnight at an employee’s home, and not used for significant private journeys). Fail any of these and the “pool car” exemption is lost entirely.
- Missing P11D and Class 1A NIC deadlines. Late or incorrect P11D submissions attract penalties and interest even where the underlying benefit was calculated correctly.
Company cars remain one of the more powerful tools available to owner-managed businesses, particularly with electric vehicles now sitting so far below petrol and diesel on the BIK scale. The rules move every tax year, though, so it’s worth checking the current rates and reviewing your fleet policy annually rather than assuming last year’s numbers still apply.
