What Is Company Car Tax? BIK Definition Explained

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.

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 2026/27 it runs from 4% 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 2026/27

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 4%) Cash equivalent: £45,000 × 4% = £1,800. Tax at 40% = £720 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.

The electric car costs Daniel £5,580 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.

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 2026/27 it is calculated as a fixed multiplier of £29,200 × the car's appropriate percentage. For Daniel's petrol car at 35%, that is £29,200 × 35% = £10,220, taxed at 40% = £4,088 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.”

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

Do I pay company car tax if I only use the car for work?

If a car is genuinely available only for business use and is never used privately, including no commuting, there is no benefit and no company car tax. In practice this is hard to prove, and any private use, including ordinary commuting, makes the full benefit in kind charge apply. Pool cars shared by several employees and kept on site can be exempt.

Is company car tax cheaper than buying my own car?

It depends on the car and your mileage. For a low-emission or electric car, the tax can be very modest and the employer covers purchase, insurance and maintenance, often making it cheaper than personal ownership. For a high-emission car, the annual tax can run into thousands, so a car allowance and personal purchase may work out better.

Will the electric car percentage stay at 4%?

No. The 4% rate applies for 2026/27, but the appropriate percentage for electric cars is set to rise by one percentage point a year in the following tax years under published government plans. Electric cars remain far cheaper than combustion equivalents, but the gap narrows gradually over time.