A company car can be a valuable part of a pay package, but the headline monthly lease figure rarely tells you what it will really cost. If the vehicle is available for private use, HMRC normally treats it as a taxable benefit. The resulting benefit in kind car tax can make similarly priced cars produce very different deductions from your pay.
For the 2026/27 tax year, running from 6 April 2026 to 5 April 2027, the calculation still rewards cars with low carbon dioxide emissions, especially fully electric models. Before accepting a vehicle through a company car scheme UK employees should compare its taxable value, their tax rate, any salary sacrificed and likely running costs.
How Company Car Tax Is Calculated
The basic calculation has three stages. First, find the car’s taxable list price, often called its P11D value. Second, multiply that figure by the appropriate benefit-in-kind percentage for its fuel type, carbon dioxide emissions and, for some plug-in hybrids, electric-only range. This gives the annual taxable benefit. Finally, multiply that benefit by your marginal income-tax rate.
The taxable list price is not necessarily the discounted price paid by the employer or leasing company. It normally includes VAT, delivery charges, number plates and taxable factory-fitted accessories. Optional equipment can therefore increase your tax bill even when the employer negotiates a large fleet discount.
A simple formula is: P11D value multiplied by the BIK percentage, then multiplied by your income-tax rate. Your actual deduction may differ if the car is unavailable for part of the year, you make qualifying private-use payments, or your tax position changes.
BIK Rates for 2026/27
The most important figure for new-car buyers is the appropriate percentage. Under the BIK rates 2026 rules, a zero-emission company car is taxed at 4% of its P11D value. That remains far below the percentages applied to most petrol and diesel cars.
Plug-in hybrids emitting between 1g/km and 50g/km are placed into bands according to their official zero-emission range. For 2026/27, the rate can be as low as 4% for a qualifying range of at least 130 miles, then rises through 7%, 10%, 14% and 16% as the electric range falls. Buyers should obtain the official figure from the certificate of conformity, leasing provider or fleet manager rather than relying on an advertised estimate.
For cars above 50g/km, the percentage generally increases with emissions and reaches the maximum 37% band from 155g/km. A petrol car emitting 130g/km, for example, falls into the 32% band for 2026/27. Most diesels that do not meet the required RDE2 standard face a four-percentage-point supplement, although the total remains capped at 37%.
A Practical Cost Comparison
Consider an electric car with a £40,000 P11D value. At the 4% electric-car rate, the annual taxable benefit is £1,600. A 20% taxpayer would pay £320 a year, or about £26.67 a month. A 40% taxpayer would pay £640 a year, or about £53.33 a month.
Now compare a £35,000 petrol car emitting 130g/km. At 32%, its annual taxable benefit is £11,200. The tax is £2,240 a year for a 20% taxpayer and £4,480 for a 40% taxpayer, equal to roughly £186.67 or £373.33 a month respectively.
This explains why a more expensive electric vehicle can produce a smaller tax deduction than a cheaper combustion car. It does not prove that the electric option is always cheaper overall. You must still include any salary sacrifice, employee contribution, home-charging cost, insurance excess, mileage limits and end-of-contract charges.
Salary Sacrifice and Cash Allowances
Many schemes reduce gross salary in exchange for the car. The sacrifice is separate from BIK tax, so ask payroll for a personalised take-home-pay illustration. Also check whether the lower contractual salary affects pension contributions, overtime calculations, mortgage affordability or earnings-related benefits.
Cars emitting no more than 75g/km receive special treatment under optional remuneration rules and continue to be taxed using the normal company-car benefit calculation. For cars above that threshold, the taxable amount under salary sacrifice can be based on the higher of the salary foregone and the normal benefit value.
A cash allowance works differently. It is normally taxed as salary, after which you buy or lease your own car and carry the ownership risks. Compare net allowance, finance, depreciation, insurance, maintenance and business-mile reimbursement with the complete company-car cost. Useful related reading includes company car versus car allowance, electric car running costs and salary sacrifice car schemes.
Watch the Private Fuel Benefit
Employer-paid fuel for private journeys can trigger a separate and often expensive benefit. For 2026/27, the car fuel benefit multiplier is £29,200. HMRC multiplies this amount by the same appropriate percentage used for the car, then applies your income-tax rate.
Using the 32% petrol example, the taxable fuel benefit would be £9,344. A 40% taxpayer would therefore pay £3,737.60 in tax for the year. Unless private mileage is very high, paying for personal fuel yourself may cost less. Electricity is not treated as fuel for the company-car fuel benefit charge, which is another advantage for fully electric company cars.
Questions to Ask Before Ordering
Request the exact P11D value, official carbon dioxide figure, fuel type, electric range where relevant and 2026/27 BIK percentage. Ask whether servicing, tyres, insurance, breakdown cover and road tax are included, and whether there is an employee contribution or salary sacrifice.
Confirm the mileage allowance, excess-mileage charge, early termination rules and what happens during parental leave, long-term sickness or redundancy. Finally, ask payroll for an estimate based on your own tax band, because Scottish income-tax rates differ from those in England, Wales and Northern Ireland.
Frequently Asked Questions
Do I pay company car tax if I only use the car for work?
A genuine pool car or a vehicle restricted to qualifying business journeys may be exempt. Ordinary commuting and other private availability can create a taxable benefit, even when private mileage is low.
Does a company car affect my tax code?
Usually, yes. HMRC may collect the tax through an adjusted PAYE code, while some employers payroll the benefit directly. Check your payslip and Personal Tax Account after receiving or changing a car.
Are electric company cars tax-free in 2026?
No. Fully electric cars have a 4% BIK rate in 2026/27, so tax is still payable when the car is available for private use. The charge is simply much lower than for most combustion cars.
Can employee payments reduce the taxable benefit?
Qualifying capital contributions can reduce the taxable price, subject to HMRC limits, while required private-use payments may reduce the benefit. The treatment depends on how the payment is structured, so obtain confirmation from payroll.
Choosing on Total Cost, Not List Price
The best company car is not automatically the cheapest model or the one with the lowest monthly sacrifice. Start with the P11D value and 2026/27 BIK percentage, calculate the tax at your marginal rate, then add every employee payment and realistic running cost. That comparison reveals which vehicle genuinely fits your finances and avoids an unpleasant surprise after delivery.
