Company Car and Benefits

Providing a company car or other benefits in kind to employees is a common practice, but the tax treatment is complex. Employees pay Income Tax on the taxable value of the benefit, and employers pay Class 1A National Insurance at 15%. The amount of tax depends on the type of benefit, its value, and (in the case of cars) the vehicle's CO2 emissions and list price. All reportable benefits must be disclosed on form P11D by 6 July following the tax year. This guide covers the main company car and van rules, fuel benefit charges, optional remuneration arrangements, and the car benefit calculator approach.

Company Car Tax (BIK)

Company car benefit is calculated as a percentage of the car's list price (including delivery, VAT, and most optional extras, but excluding the first-year registration fee and road fund licence). The percentage is determined by the car's CO2 emissions measured in grams per kilometre (g/km) using the WLTP test cycle. For 2025/26, the rates start at 2% for zero-emission cars (electric vehicles) and rise in 1% bands up to 37% for the most polluting petrol and diesel cars (above 160 g/km CO2). There is a 4% supplement for diesel cars that do not meet the RDE2 standards. The BIK percentage is applied to the list price to give the taxable benefit value. For example, an electric car with a list price of £40,000 has a BIK of 2% × £40,000 = £800; a petrol car emitting 130 g/km with a £30,000 list price has a BIK of 30% × £30,000 = £9,000. The employee pays Income Tax on this amount, and the employer pays 15% Class 1A NIC on it.

Fuel Benefit Charge

If the employer provides free fuel for private use in a company car, an additional fuel benefit charge applies. The fuel benefit is calculated using a fixed fuel benefit multiplier of £27,800 (2025/26) multiplied by the same CO2-based BIK percentage used for the car benefit. For example, if the BIK percentage is 25%, the fuel benefit is 25% × £27,800 = £6,950. This is added to the employee's P11D and taxed accordingly. The only way to avoid the fuel benefit charge is to require employees to reimburse the employer for all private fuel — a cumbersome arrangement that requires detailed mileage logs. Most employers avoid providing free private fuel for this reason, or include it only for employees who incur significant business mileage.

Van Benefit

If you provide a van that an employee can use privately, a van benefit charge applies. For 2025/26, the standard van benefit is £3,960 per year. If the employer also provides free private fuel for the van, an additional van fuel benefit of £757 applies. Zero-emission vans qualify for a 100% reduction on the van benefit charge (so the charge is nil for electric vans). Like company cars, the van benefit must be reported on form P11D and is subject to Income Tax through the employee's tax code and employer Class 1A NIC.

Optional Remuneration Arrangements

Where a company car is provided under an optional remuneration arrangement (salary sacrifice), the taxable benefit is the higher of the standard BIK benefit and the cash foregone. This rule, introduced from April 2017, effectively removes the tax advantage of salary sacrifice for cars (except ultra-low emission vehicles). For electric and low-emission cars with CO2 emissions of 75 g/km or less, the optional remuneration rules do not apply, preserving the tax advantage. If you operate a salary sacrifice car scheme, the benefit calculation must take the optional remuneration rules into account, which can significantly increase the tax charge compared with a conventional company car arrangement.

P11D Reporting

All reportable benefits — cars, vans, fuel, private medical insurance, low-interest loans, and accommodation — must be reported on form P11D for each employee by 6 July after the tax year end. A separate form P11D(b) summarises the total Class 1A NIC due and must be submitted by the same date. Class 1A NIC is payable by 19 July (22 July if paying electronically). The employee's tax code is adjusted to collect the Income Tax due on the benefits, usually through the following year's PAYE code. Penalties for late P11D filing start at £100 per 50 forms (or part thereof) for the first month, with additional penalties for longer delays.

Car Benefit Calculator

HMRC provides the company car and car fuel benefit calculator online. You input the car's list price, CO2 emissions, fuel type, and registration date, and the calculator returns the BIK percentage and the taxable benefit. Most payroll software also calculates car benefits automatically. The key is keeping accurate records of each car's specifications at the point it is first made available to the employee — BIK percentages are fixed for the life of the car (subject to annual rate changes) based on the list price and CO2 figures.

Explore more UK business and employer guides or try our calculators.