Company cars and the tax puzzle
How benefit-in-kind tax on company cars works, why electric cars still come out ahead, and what changes for employers from 2027.
Company car tax feels complicated because several rules interact: the car’s list price, its CO2 emissions, the fuel type, whether the company pays for private fuel and whether the car is provided through salary sacrifice. Here is how the pieces fit together.
How the benefit is calculated
A company car is a benefit in kind. The taxable value is the car’s list price when new (including options and VAT, but ignoring any discount) multiplied by an appropriate percentage set by the car’s CO2 emissions. You then pay income tax on that value at your marginal rate, and the company pays Class 1A National Insurance on it.
For a petrol car emitting 130g/km with a £30,000 list price, the percentage is 31%, so the taxable benefit is £9,300 a year. A higher-rate taxpayer would pay £3,720 in income tax on it.
Why electric cars still win
Zero-emission cars attract a much lower percentage, which is why so many directors have moved to electric. The rates are rising gradually, but remain far below those for petrol and diesel:
| Tax year | Zero-emission car percentage |
|---|---|
| 2025/26 | 3% |
| 2026/27 | 4% |
| 2027/28 | 5% |
| 2028/29 | 7% |
| 2029/30 | 9% |
On a £45,000 electric car the 2026/27 benefit is £1,800, giving a higher-rate taxpayer a tax bill of £720 a year. The same money spent on a conventional car could cost ten times as much in tax.
Salary sacrifice
Electric cars are one of the few benefits where salary sacrifice still works well. Because ultra-low-emission cars are exempt from the usual salary sacrifice rules, giving up salary in exchange for the car saves income tax and National Insurance on the salary forgone, while the car itself is taxed at the low benefit rate.
Private fuel: usually a bad idea
If the company pays for fuel used privately in a petrol or diesel company car, a separate fuel benefit applies, calculated on a fixed figure set by HMRC each year rather than on the fuel actually used. For most drivers the tax exceeds the value of the fuel. Charging an electric car at work, by contrast, is not a taxable benefit at all.
What changes for employers
Benefits in kind are currently reported on form P11D by 6 July after the end of the tax year, with Class 1A National Insurance paid by 22 July. HMRC plan to make payrolling of benefits mandatory from April 2027, which means the benefit will be taxed through payroll each month instead. If you provide cars to staff, now is the time to make sure your payroll can handle it.
What we recommend
- Before buying or leasing, ask us to compare the after-tax cost of the car through the company and personally.
- Choose electric or very low emission vehicles where the business case stacks up.
- Avoid company-paid private fuel for petrol and diesel cars.
- Keep a record of list price, options, CO2 figure and availability dates for every car provided.
If you would like us to run the numbers on a specific car, get in touch.
This article is a general guide based on the rules as we understand them at the date of publication. It is not advice for your specific circumstances. Please speak to us before acting on anything in it.
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Tell us a little about your business and we will come back to you within one working day with how we can help and what it will cost. Or speak directly to Craig, our senior partner, on 07949 534119.