- Company car tax is your car’s P11D value multiplied by its BIK percentage, then by your income tax rate.
- Fully electric company cars are taxed at just 4% for 2026/27, against 23% to 37% for petrol and diesel.
- Free private fuel triggers a separate charge that often costs more than it saves, so most directors avoid it.
Company car tax in the UK is worked out by multiplying your car’s P11D value by its Benefit in Kind (BIK) percentage, then by your income tax rate. For 2026/27, a fully electric car is taxed at just 4%, while petrol and diesel cars sit between 23% and 37%.
That gap is huge. A higher-rate director in an electric company car might pay a few hundred pounds a year. The same director in a petrol equivalent could pay several thousand. Getting the maths right before you buy is one of the more valuable decisions our accounting services help directors with.
How is company car tax calculated?
Company car tax is calculated with three figures: your car’s P11D value, its BIK percentage, and your income tax rate. Multiply them together and you get your annual tax bill.
The formula is simple once you have the numbers:
BIK value = P11D value × BIK percentage
Annual tax = BIK value × your income tax rate
So a £40,000 car with a 30% BIK band gives a BIK value of £12,000. A higher-rate taxpayer at 40% would pay £4,800 a year, or £400 a month.
What counts towards the P11D value?
The P11D value is the car’s list price including VAT, delivery charges, and any factory-fitted optional extras. It’s the manufacturer’s price when new, not what you actually paid after any discount.
It excludes the first-year registration fee and vehicle tax. If you’re unsure where this figure comes from on your paperwork, our guide to submitting a P11D walks through the form itself.
What are the BIK percentage bands?
The BIK percentage is set by HMRC and rises with your car’s CO2 emissions. Cleaner cars sit in far lower bands, which is the whole point of the system.
Here’s how the main categories compare for 2026/27.
Car type | CO2 emissions | BIK percentage 2026/27 |
Fully electric | 0 g/km | 4% |
Plug-in hybrid | 1 to 50 g/km | 6% to 19% (by electric range) |
Petrol / RDE2 diesel | 51 g/km and up | 23% rising to 37% |
Non-RDE2 diesel | 51 g/km and up | Add 4% surcharge, capped at 37% |
For petrol and RDE2-compliant diesel cars, the rate climbs by roughly 1% for every extra 5 g/km of CO2, until it hits the 37% ceiling. A diesel that doesn’t meet the Real Driving Emissions Step 2 standard gets a 4% surcharge on top, though it still can’t go past 37%.
These bands change every tax year, so always check the current figure before committing. The rates are also confirmed to keep rising gradually through to 2029/30, which matters if you’re signing a three or four-year lease.
Why are electric company cars tax-efficient?
Electric company cars are tax-efficient because they sit in the lowest BIK band by a wide margin. At 4% for 2026/27, an EV is taxed on a fraction of its value compared with a petrol car in the high twenties or thirties.
The saving flows straight to your take-home pay. Because the BIK value is so low, the tax you pay on the benefit is low too, even on an expensive car.
There’s a business angle as well. Running the car through your company can interact with your wider limited company expenses and how you structure director pay, which is worth modelling properly rather than guessing.
Workplace charging for an electric company car isn't treated as a taxable fuel benefit by HMRC, so charging at the office won't add to your bill.
Worked example: petrol vs electric
The clearest way to see the difference is to run the same driver through both options. Take a higher-rate taxpayer at 40%, comparing a £40,000 petrol car against a £40,000 electric one.
| Electric car | Petrol car (110 g/km) | |
| P11D value | £40,000 | £40,000 |
| BIK percentage 2026/27 | 4% | 27% |
| BIK value | £1,600 | £10,800 |
| Annual tax at 40% | £640 | £4,320 |
| Monthly tax | £53 | £360 |
The electric driver pays around £640 a year. The petrol driver pays £4,320 for an identically priced car. That’s a difference of nearly £3,700 every year, purely from the BIK band.
For directors deciding how to reward themselves tax-efficiently, this sits alongside other choices like dividends and salary. Our guide on tax-efficient ways to take money out covers how a company car fits the bigger picture, and there’s more on trimming your bill in our piece on how to pay less corporation tax.
What is fuel benefit and how do I avoid it?
Fuel benefit is a separate charge that applies when your company pays for your private fuel. It’s calculated using a fixed multiplier of £29,200 for 2026/27, multiplied by your car’s BIK percentage, then taxed at your income tax rate.
That charge catches a lot of directors out. Because it’s based on a flat £29,200 figure rather than what you actually spend, you often pay more tax on the benefit than the private fuel is worth.
How to avoid the fuel benefit charge
You can sidestep it in a few ways:
- Pay for your own private fuel and claim back only genuine business mileage from the company.
- Fully reimburse the company for private fuel before 6 July following the tax year.
- Choose an electric car, since workplace electricity for private use isn’t treated as a fuel benefit.
For most directors doing modest private mileage, reimbursing business travel only works out cheaper than accepting free fuel. It’s worth running the numbers both ways, which is the kind of thing an experienced limited company accountant will do as a matter of course.
How Sleek helps with company car tax
Choosing a company car isn’t really a car decision, it’s a tax decision. The right choice depends on your P11D value, your income tax band, how much you drive privately, and how the car interacts with your dividends and salary.
Sleek models all of that before you buy, so you know the real annual cost rather than finding out on your tax code. We help you compare electric against petrol, factor in the fuel benefit trap, and keep the whole arrangement compliant.
Disclaimer: The preceding information is not legal advice. This content is aimed to provide general guidance. For more formal or legal advice, contact Sleek directly.
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FAQs on company car tax UK
Do I pay company car tax on an electric car?
Yes. Electric company cars aren’t exempt, but they’re taxed at just 4% for 2026/27. On a £40,000 EV that’s a BIK value of £1,600, so a higher-rate taxpayer pays around £640 a year. It’s still by far the most tax-efficient company car option, especially compared with the 23% to 37% bands petrol and diesel cars face.
Is company car tax based on what I paid for the car?
No. It’s based on the P11D value, which is the manufacturer’s list price when new, including VAT, delivery, and factory-fitted extras. Any discount you negotiated is ignored. This catches buyers out, because the tax reflects the official list price even if you paid thousands less for the vehicle in a deal.
How do I pay company car tax?
Company car tax is usually collected through your tax code via PAYE, so it comes out of your monthly pay automatically. HMRC adjusts your code once your employer reports the benefit. Directors of their own company still report the benefit on form P11D each year. Your payslip and tax code should reflect the deduction once everything’s set up correctly.
What is the diesel surcharge on company cars?
The diesel surcharge is an extra 4% added to the BIK percentage of diesel cars that don’t meet the Real Driving Emissions Step 2 (RDE2) standard. It’s capped so the total percentage never exceeds 37%. Most diesels registered after September 2018 meet RDE2 and escape it, but older diesel models can still be caught by the extra charge.
Are company car tax rates going up?
Yes. The electric car BIK rate rose to 4% for 2026/27 and is set to reach 5% in 2027/28, then climb gradually to 9% by 2029/30. Petrol and diesel rates also rise by roughly 1% a year toward the 37% cap. Even with these increases, electric cars stay far cheaper to run for tax than combustion vehicles.
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Can my limited company claim the cost of a company car?
Yes, though the treatment depends on the car. Electric cars can qualify for a 100% first-year capital allowance, while petrol and diesel cars get relief more slowly based on emissions. The company also pays Class 1A National Insurance on the BIK value. It’s worth planning the purchase timing and structure with an accountant to get the full benefit.
Is a company car worth it for a director?
It depends on the car. For an electric vehicle, the low 4% BIK rate combined with company relief on the purchase often makes it very worthwhile. For a petrol or diesel car, the high BIK charge frequently outweighs the benefit, and taking a mileage allowance in a personal car can work out cheaper. Running both scenarios is the only reliable way to know.
