MTD mandatory · April 2026
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What Is Company Car Tax? BIK Definition Explained

A company car is one of the most valued perks in the UK, but HMRC taxes it as income. Here is exactly how the bill is built and why electric cars are so much cheaper.

What Is Company Car Tax? BIK Definition Explained
Company car tax is the income tax you pay on the private use of a car provided by your employer; HMRC treats it as a benefit in kind and calculates the taxable amount by multiplying the car's list price by an appropriate percentage based on its CO2 emissions, then taxing that at your marginal rate.

A company car feels like a free perk, but to HMRC it is income in metal form. The tax you pay on it, company car tax, is one of the larger benefit in kind charges most employees will ever face. The good news is the calculation is mechanical: once you know three numbers, you can work out the bill yourself.

Key takeaways
  • Company car tax is income tax on the private use of an employer-provided car, treated as a benefit in kind.
  • The taxable value is the car's list price multiplied by an appropriate percentage tied to CO2 emissions.
  • Electric cars attract just 3% in 2025/26; high-emission cars reach the 37% cap.
  • You pay tax on that value at your marginal rate of 20%, 40% or 45%.
  • Free private fuel is taxed separately using a fixed multiplier of £28,200 for 2025/26.

The Three-Step Calculation

Company car tax always follows the same formula, set out in HMRC's benefit in kind rules.

  1. List price (P11D value) — the manufacturer's list price including VAT, delivery and most optional extras. This is not what your employer paid; it is the showroom price.
  2. Appropriate percentage — a figure driven by the car's CO2 emissions. In 2025/26 it runs from 3% for zero-emission cars up to a maximum of 37% for the dirtiest petrol and diesel models.
  3. Your tax rate — the cash equivalent (steps 1 × 2) is added to your income and taxed at 20%, 40% or 45%.
Appropriate percentage
The percentage of a company car's list price that becomes taxable, determined by the car's CO2 emissions and fuel type. Lower emissions mean a lower percentage and a smaller tax bill.

A Worked Example: Electric vs Petrol in 2025/26

Daniel is a higher-rate taxpayer (40%). His employer offers him a choice between two cars, each with a £45,000 list price.

Option A: electric car (0 g/km CO2, appropriate percentage 3%) Cash equivalent: £45,000 × 3% = £1,350. Tax at 40% = £540 a year.

Option B: petrol car (150 g/km CO2, appropriate percentage 35%) Cash equivalent: £45,000 × 35% = £15,750. Tax at 40% = £6,300 a year.

ElectricPetrol
List price£45,000£45,000
Appropriate percentage3%35%
Cash equivalent£1,350£15,750
Annual tax (40%)£540£6,300

The electric car costs Daniel £5,760 a year less in tax for the same list price, which is why salary-sacrifice electric car schemes have boomed. This sits within the wider benefit in kind regime, and a benefit this large can push someone into a K tax code.

£540
Annual tax on the £45k electric car
£6,300
Annual tax on the £45k petrol car
£5,760
Yearly saving from going electric

The Separate Fuel Benefit

If your employer also pays for your private fuel (not just business mileage), there is a second charge called the car fuel benefit. For 2025/26 it is calculated as a fixed multiplier of £28,200 × the car's appropriate percentage. For Daniel's petrol car at 35%, that is £28,200 × 35% = £9,870, taxed at 40% = £3,948 a year, on top of the car charge. Because the multiplier ignores how much fuel you actually use, free private fuel is rarely worth accepting unless your private mileage is very high.

How You Pay It

Company car tax is collected through PAYE. HMRC reduces your tax code by the cash equivalent so that extra tax is deducted from each pay packet automatically. Your employer reports the car on a P11D after the tax year, or payrolls the benefit so the charge appears on your payslips in real time. You can confirm the code being applied to your car using the check my tax code tool.

Company car tax is the clearest example of tax policy steering behaviour: the same list price can cost £540 or £6,300 a year purely on the strength of the tailpipe.
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Related terms

  • Benefit in kind — the category company car tax falls under.
  • K tax code — what your code becomes when the car benefit exceeds your allowance.
  • Check my tax code — verify the code HMRC is operating for your car.

People also ask

Frequently asked questions

How is company car tax calculated?
Company car tax is worked out in three steps. First, take the car's P11D value, which is broadly its list price including VAT and delivery. Second, multiply it by the appropriate percentage set by the car's CO2 emissions, ranging from 3% for electric cars to 37% for the highest emitters in 2025/26. Third, multiply the result, the cash equivalent, by your income tax rate of 20%, 40% or 45%.
Why is company car tax so low on electric cars?
The government uses company car tax to encourage low-emission vehicles. Fully electric cars carry an appropriate percentage of just 3% in 2025/26, compared with 30% or more for many petrol and diesel cars. This means the taxable benefit, and therefore the tax bill, on an electric company car can be a fraction of that on an equivalent combustion car. The percentage for electric cars rises gradually in later years.
How do I pay company car tax?
Company car tax is normally collected through PAYE by adjusting your tax code, so more tax is deducted from your salary each month. Your employer reports the car on a P11D after the tax year, or payrolls the benefit in real time. If the benefit value is large, your code may become a K code, where the deductions exceed your tax-free allowance.

Related

What Is Benefit in Kind? BIK Tax Explained (2025/26)kcheck my tax code
HMRC official guidance

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