It’s fairly common for employers to offer company cars to employees and directors, or for directors to take one through their own limited company. The tax rules for a company car can be a bit complicated though. In this article we’ll explain how company car tax works, and what difference it makes if you have an electric company car compared to a petrol or diesel alternative. We talk about leasing a car for your business in another article.

Do I need to pay tax on a company car?

The answer to this partly depends on what you’re using the vehicle for. When a company car is used for personal reasons instead of purely for business, it becomes a ‘perk’.

Even though the perk isn’t cash, it does benefit the employee or director personally. This increases the value of what they get from the company, so it’s treated as a taxable benefit (known as a benefit in kind, or BiK for short). It can mean:

• The individual must pay income tax on the value of this benefit
• The employer must pay Employer’s National Insurance Contributions (NICs) on the benefit’s value

If you’re a director and own the car through your limited company, you might end up paying tax on it twice: once as the individual receiving the benefit, and again as the company which provides it. But, your limited company can claim the expense of providing the benefit and the National Insurance it pays against its bill for Corporation Tax.

Who has to tell HMRC about company cars?

It’s the employer’s responsibility to tell HMRC about any benefits in kind, including company cars, so that the employer and individual both pay the right amount of tax on the benefit. You can report these through payroll (literally known as ‘payrolling benefits’).

Will I pay less tax on an electric company car?

Electric cars can be more tax efficient for limited companies because the amount of benefit in kind tax you pay is based on:

• Its list price. This is the manufacturer’s recommended retail price at the time the vehicle was made available to the individual, including any accessories, optional extras, delivery fees, and VAT
• The car’s BiK percentage rate. This is set by HMRC, and is based on a car’s CO2 emissions value according to the vehicle’s first registration certificate (which is set for the life of the car). Higher vehicle emissions mean you’ll pay a higher rate – which is why electric car tax tends to be lower! We’ll explain this further down.
• The rate of income tax the individual pays

Can I reduce the amount of tax I pay on a company car?

Employees can make ‘capital contributions’ of up to £5,000 towards buying the car. This reduces the value of the benefit because they’re paying something towards it themselves, so there’s less tax for them to pay.

How much is a car’s BiK rate?

BiK percentage rates vary from one car to another because they’re charged on emissions. In 2026/27 fully electric cars are currently charged (pun only slightly intended) at a BiK rate of 4% of the car’s list price. This is an increase from 2025/26’s rate of 3%. Some of the most popular petrol cars have a rate of 30% or more.

 
The BiK rates (also known as the ‘appropriate percentage for company car benefits’) are set by HMRC, and can be checked online. You’ll need to know the car’s CO2 emissions, which are measured in grams per kilometre (g/km). This can usually be found on the manufacturer’s website or in the vehicle’s registration documents. Once it’s set, it won’t change – at least for tax purposes. Your MOT might say something different!
 

Do I need to pay tax on the fuel in my company car?

It depends who pays for it, who owns the vehicle, and what the trip is for!

If you pay for the fuel you use on a business journey then your company can reimburse you for any business miles you do. The company can claim this reimbursed amount as an allowable expense before tax.

When a company pays for fuel used on personal journeys it’s classed as a perk, so as an employee you’d normally pay a type of tax called the fuel benefit charge. But…

Unlike petrol and diesel though, electricity isn’t classed as a ‘fuel’ in this case. You won’t need to pay the fuel benefit tax if you drive a fully electric car, even if your company pays for charging and you use it for personal mileage.

 
We’re going to give an example of working out the fuel benefit tax for a non-electric vehicle below, just to help you see how different vehicles can impact your tax bill.

How do I work out the tax on fuel?

The tax on fuel, also known as the ‘car fuel benefit charge’ doesn’t apply to electric company cars because electricity isn’t classed as a fuel. For other vehicles, such as petrol and diesel, it’s worked out using the Car Fuel Benefit Charge Multiplier which is set by HMRC each year. The Car Fuel Benefit Charge Multiplier is:

• 2025/26: £28,200
• 2026/27: £29,200

You’ll multiply it by what HMRC mysteriously refer to as ‘the appropriate percentage’. This is the BiK percentage rate which is based on CO2 emissions. The next step is to multiply the answer by the rate of tax you pay.

Should I get an electric company car?

Like any business decision, this depends on your needs and preferences! If you’re going to have any sort of company car which you drive for personal reasons, then an electric one is likely to be more tax efficient – but you might also need to think about size and usage.

What sort of company car should I get?

Again, this should be based on what you need from the vehicle, and what your company can afford to pay. We’ve calculated the tax payable on some of this year’s most popular company cars so you can compare options in the table below. The amounts are based on the rates for 2025/26.

• List price: The recommended retail price including VAT and accessories. Sometimes called the ‘on the road’ price
• BiK Rate: The ‘appropriate percentage’ set by HMRC and based on vehicle emissions
• Benefit in Kind: The value of the benefit the employee or director receives. This is the list price multiplied by the BiK Rate.
• Tax payable: The amount of tax the individual will pay on the benefit they receive. It’s the Benefit in Kind multiplied by the highest rate of tax they pay.
• Corporation Tax Relief: The company can claim the cost of providing the benefit and the employer’s National Insurance it pays on it as an allowable expense. We’ve shown this as a total in the column called ‘Corporation Tax Relief’, and assume that the company pays 19% on its profits.

Capital Allowances and company cars

Capital allowances mean companies can claim tax relief on the assets they buy which, in turn, reduces their Corporation Tax bill. This doesn’t include leased or hybrid cars.

Fully electric vehicles which are:

• New and unused: Qualify for 100% first-year allowances, so you can claim tax relief on the full value of the asset
• Second hand: Only qualify for main rate 18% capital allowances

What about capital allowances for installing electric car chargers?

The good news is that there are grants available for installing workplace charging points. The rules around tax for charging vehicles and paying for chargers to be installed can get quite complicated depending on where the charger is used, and what sort of journeys you go on. HMRC’s tax manual does go over some of the issues relating to electric cars, but it’s very much worth speaking to an accountant!

 
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