Company car tax: how the benefit is worked out

Around 920,000 employees received a company car benefit in the most recent HMRC statistics, generating a taxable value of £3.07 billion and roughly £1.14 billion of income tax plus £0.44 billion of National Insurance ^[4]. For the 2026-27 tax year the appropriate percentage that drives the charge runs from 4% for a zero-emission car to 37% for the most polluting models ^[1].

Company car tax is not a separate tax. It is income tax on a benefit in kind, paid by the employee, alongside Class 1A National Insurance at 15% paid by the employer on the same value ^{[3] [10]}. Getting the calculation right depends on a handful of inputs held on the employee and vehicle record: the list price, the CO2 figure, the electric range for hybrids, the fuel type and the dates the car was available.

This article sets out how employers calculate the cash equivalent of a company car, the 2026-27 percentage bands, worked examples by fuel type, the separate fuel benefit charge, the reductions that apply, the reporting deadlines, and the scheduled changes to rates and reporting that payroll teams need to plan for.

Key takeaways

• The taxable value of a company car is its list price, plus accessories, less capital contributions, multiplied by the appropriate percentage for its CO2 band ^{[2] [1]}.
• For the 2026-27 tax year, zero-emission cars sit at 4%, plug-in hybrids at 4% to 16% depending on electric range, and conventional cars at 17% to 37% ^[1].
• Employers pay Class 1A National Insurance at 15% on the car benefit, and on any car fuel benefit ^[10].
• Free private fuel triggers a separate charge based on a £29,200 multiplier for the 2026-27 tax year ^[5].
• The electric car rate rises by 1 percentage point in 2027-28 and 2 points a year from 2028-29, reaching 9% in 2029-30 ^{[6] [7]}.
• Company cars are in the first phase of mandatory payrolling of benefits in kind from 6 April 2027 ^[12].

What company car tax is and who pays it

An employee pays tax on a company car when the car is available for private use by the employee or their family, and commuting counts as private use ^[3]. The tax is charged on the car's cash equivalent, a notional value set by statute rather than by what the car costs the employer to run ^[2].

The employee's income tax

The cash equivalent is added to the employee's taxable income and taxed at the employee's marginal rate ^{[3] [18]}. In England, Wales and Northern Ireland that means 20%, 40% or 45%, so the same car costs a higher-rate taxpayer twice as much in tax as a basic-rate taxpayer ^[18]. Where the benefit is not payrolled, HMRC collects the tax by reducing the employee's tax code, and updates the code when the car's value changes ^{[3] [8]}.

The mechanics of how a benefit flows into the code are covered in the guide to how a P11D affects a tax code.

The employer's Class 1A National Insurance

The employer pays Class 1A National Insurance on the same cash equivalent, at 15% for the 2026-27 tax year ^[10]. Employers must report the car on end-of-year forms and pay Class 1A on its value ^[8]. With 920,000 recipients and £0.44 billion of National Insurance liabilities in the latest statistics, Class 1A on cars is a material cost line for any employer running a fleet ^[4].

How the cash equivalent is calculated

HMRC's guidance sets out the calculation as a sequence of steps, each of which can change the result ^{[2] [15]}.

The table summarises HMRC booklet 480, chapter 12 ^[2].

List price, accessories and capital contributions

The starting point is the list price, not the price the employer paid, so fleet discounts do not reduce the benefit ^{[2] [15]}. Since 2011-12 there has been no cap on the price, which was previously limited to £80,000 ^[2].

Qualifying accessories attached to the car are added, but mobile phones and equipment needed for the job are excluded ^[2]. Where an employee contributes towards the cost of the car or its accessories, up to £5,000 of that capital contribution is deducted. On a £45,000 electric car with a £6,000 employee contribution, only £5,000 is deducted, giving a price of £40,000 and a benefit of £1,600 at 4% rather than £1,800 ^{[2] [1]}.

Classic cars

For a car at least 15 years old at the end of the tax year, with a market value of at least £15,000 that exceeds the adjusted list price, the market value replaces the list price ^[2]. The £5,000 limit on capital contributions still applies ^[2]. Cars first registered before 1 January 1998 use engine size rather than CO2 to set the percentage ^{[2] [1]}.

The appropriate percentages for the 2026-27 tax year

The appropriate percentage is set by the car's CO2 emissions and, for cars emitting 1 to 50g/km, by the electric range ^[1]. The low-emission bands rose by 1 percentage point on 6 April 2026, while bands from 75g/km upwards were unchanged ^[1].

Zero-emission and plug-in hybrid cars

The table below shows the bands that apply to electric and plug-in hybrid cars.

Source: HMRC Employment Income Manual EIM24705 ^[1].

For plug-in hybrids registered from 1 January 2025 to 5 April 2028 that meet specific conditions, a CO2 figure of 1g/km applies for the calculation; otherwise the figure on the registration certificate is used ^[3]. Employers hold the electric range and should confirm it to the employee when asked ^[3].

Petrol and diesel cars

From 51g/km, the percentage rises in steps until it reaches the 37% ceiling at 155g/km and above ^[1].

Selected bands from EIM24705; every 5g/km step adds 1 percentage point between 75g/km and 155g/km ^[1].

Diesel cars that do not meet the RDE2 standard carry a 4% supplement, subject to the 37% maximum ^{[1] [2]}. Diesel cars certified to RDE2 have been exempt from the supplement since 2018-19 ^[1].

Worked examples by fuel type

The examples below apply the 2026-27 percentages to typical list prices, with tax at the basic and higher rates and Class 1A at 15% ^{[1] [10] [18]}.

What the examples show

A petrol car costing £10,000 less than the electric car produces a cash equivalent almost six times higher, because the percentage difference outweighs the price difference ^[1]. That gap explains why fully electric cars now account for 51% of company car benefit recipients, or 467,000 cars, in HMRC's latest figures ^[4].

For an employee on the standard 1257L code, a £1,800 electric car benefit reduces the allowance in the code by £1,800 where HMRC collects through the tax code, which can be checked with HMRC's company car and fuel benefit calculator ^{[3] [14]}. The benefit in kind tax guide explains how other benefits combine with the car in the same code.

Fuel benefit and vans

Fuel is charged separately from the car. If the employer pays for fuel used for personal journeys, the employee pays tax on a car fuel benefit as well as the car benefit ^[3].

The car fuel benefit charge

The fuel benefit is calculated by applying the car's appropriate percentage to a fixed multiplier, which is £29,200 for the 2026-27 tax year, up from £28,200 ^{[5] [1]}. For the 30% petrol car above, the fuel benefit is £8,760 (£29,200 × 30%), costing a basic-rate taxpayer £1,752 and a higher-rate taxpayer £3,504, with £1,314 of Class 1A for the employer ^{[5] [10]}.

The charge does not depend on how much private fuel is used, so a small amount of free private fuel can be expensive. Employers that reimburse business mileage in company cars commonly use HMRC's advisory fuel rates, which from 1 September 2026 range from 14p to 27p a mile for petrol cars, and 7p a mile (home charging) or 15p a mile (public charging) for fully electric cars ^{[10] [16]}.

Vans and double cab pick-ups

Vans follow a flat-rate regime rather than the list-price formula. The table below compares the car and van fuel and benefit figures for the last two tax years.

Source: GOV.UK van and fuel benefit charges for 2026-27 ^[5].

Double cab pick-ups are treated as cars for benefit in kind purposes from April 2025, which moves them from the flat van charge to the CO2-based car formula ^[13]. Vehicles purchased, leased or ordered before 6 April 2025 can keep commercial vehicle treatment until the earliest of disposal, lease expiry or 5 April 2029 ^[13].

Reductions, shared cars and salary sacrifice

Several rules reduce the cash equivalent, and payroll records need to capture the facts that support each one ^[2].

Unavailability and private use payments

The charge is reduced in proportion to days the car was unavailable, but only periods of 30 or more consecutive days count ^[2]. A car provided from 1 October in a tax year, for example, is charged for roughly half the year ^{[2] [15]}.

Payments the employee makes specifically for private use of the car are deducted and can reduce the charge to nil, but payments for fuel or insurance do not qualify ^[2]. Where a car is shared, each employee's benefit is calculated separately and reduced on a just and reasonable basis, so the total cannot exceed the charge for a single private user ^[2].

Pool cars and exempt vehicles

Genuine pool cars, used by more than one employee for business and normally kept on the employer's premises, do not need to be reported ^[8]. The same applies to cars adapted for disabled employees where private use is limited to home-to-work journeys, and to emergency vehicles used by on-call police, fire, ambulance and paramedic staff ^[8].

Salary sacrifice cars

Where a car is provided through salary sacrifice, the taxable value is the higher of the salary given up and the normal benefit in kind charge ^[11]. Cars with CO2 emissions of no more than 75g/km are excluded from that comparison and always use the normal earnings charge, which is why low-emission cars dominate salary sacrifice schemes ^{[11] [1]}. The full mechanics are set out in the guide to the salary sacrifice car scheme.

Reporting deadlines and the move to payrolling

Company cars generate two reporting streams: in-year notifications and year-end returns ^{[8] [9]}.

P46(car) notifications

Employers use form P46(car) when they provide a company car, stop providing one or provide an additional car, with deadlines tied to the quarter in which the change happens ^[8].

Source: GOV.UK, tell HMRC about an employee's company car ^[8].

P11D, P11D(b) and Class 1A payment

After the end of the tax year, employers report the car on the P11D and the total Class 1A on the P11D(b) by 6 July, and pay Class 1A by 22 July electronically or 19 July by cheque ^[9]. A late P11D(b) attracts a penalty of £100 per 50 employees for each month or part month it is late ^[9]. The return itself is covered in the guide to the P11D form.

Mandatory payrolling from 6 April 2027

From 6 April 2027, company cars are in phase 1 of mandatory payrolling of benefits in kind, with income tax and Class 1A reported in real time through payroll ^{[12] [17]}. HMRC has said final phase 1 guidance will align with the Autumn Budget 2026, and that data item guidance will reflect the removal of 94 RTI data fields for benefits in kind ^[12].

In practice the car's cash equivalent will be spread across pay periods and taxed through the Full Payment Submission, which moves the calculation from a year-end spreadsheet into every pay run. HMRC-recognised UK payroll software has to hold the vehicle data (list price, CO2, electric range, availability dates) on the employee record to do this. The transition is covered in detail in the guide to mandatory payrolling of benefits, and bureaux preparing several client schemes at once typically centralise it in a payroll bureau platform.

Scheduled rate changes to plan for

Company car percentages are set years in advance, which allows employers to model the cost of a car over its whole lease ^{[6] [7]}.

The 2027-28 rates follow the 1-point annual increase legislated for the low-emission bands, and the 2028-29 and 2029-30 rates come from the Autumn Budget 2024 policy paper ^{[6] [7]}.

What the changes mean for a four-year lease

From 2028-29, hybrids with 1 to 50g/km are taxed on a single rate rather than by electric range, so the most efficient hybrids jump to 18% ^{[7] [13]}. On a £40,000 hybrid with a 45-mile range, the cash equivalent rises from £4,000 in 2026-27 to £7,200 in 2028-29 ^{[1] [7]}.

A £45,000 electric car moves from £1,800 in 2026-27 to £2,250, £3,150 and £4,050 over the following three tax years, still far below a comparable petrol car ^{[6] [7]}. Platforms that model these costs inside their own fleet or HR products can pull the calculation from an HMRC-recognised payroll API rather than maintaining rate tables themselves.

Check how a company car affects a tax code

Where the car benefit is collected through the tax code, the employee's code falls by the value of the benefit. The Moonworkers tax code checker shows how a code is built and what an adjusted code means for each pay period.

Conclusion

Company car tax is a formula with five inputs, and every one of them sits in employer records: list price, accessories, contributions, emissions and availability. The size of the gap between the 4% electric band and the 30% plus petrol bands means that a single wrong field, such as a missing electric range or a diesel supplement applied to an RDE2 car, can shift the employee's tax and the employer's Class 1A by thousands of pounds a year.

The next two years change where that formula runs. Rising electric and hybrid percentages alter the cost of every new lease, and mandatory payrolling from 6 April 2027 moves the calculation from the year-end P11D into each pay period. Employers that already hold clean vehicle data on the payroll record will find the transition largely mechanical; those relying on year-end spreadsheets will need to rebuild that data before the first April 2027 pay run.

Frequently asked questions

How much is company car tax on an electric car?

For the 2026-27 tax year, a zero-emission company car is taxed on 4% of its list price ^[1]. On a £45,000 car that is a cash equivalent of £1,800, costing a basic-rate taxpayer £360 a year and a higher-rate taxpayer £720. The employer also pays Class 1A National Insurance of £270 at 15%.

Is company car tax based on the list price or the price paid?

It is based on the list price on the day before first registration, including VAT and delivery charges, plus qualifying accessories ^[2]. Any discount the employer negotiates does not reduce the benefit. Employee capital contributions of up to £5,000 can be deducted.

Does paying for private fuel reduce company car tax?

Paying for fuel does not reduce the car benefit itself, because payments for fuel or insurance are not treated as payments for private use of the car ^[2]. It can avoid the separate car fuel benefit charge, which applies when the employer provides free private fuel and is based on a £29,200 multiplier for the 2026-27 tax year.

Do employers still need to submit a P11D for company cars?

For the 2026-27 tax year, unless the car is already payrolled, employers report it on the P11D and pay Class 1A after the year end, with the return due by 6 July ^[9]. From 6 April 2027, company cars move into mandatory payrolling, with tax and Class 1A reported in real time through payroll.