A guide to company car tax: What employers need to know

Running a business means balancing rewards for your team with the cost of providing them. Few benefits are as popular – or as closely monitored by HMRC – as the company car. Offer the perk without preparation and the tax bill can outweigh the goodwill. Handle it with care and the right vehicle can save a director money, support recruitment and even showcase your green credentials.

This guide sets out how company car tax works for the 2025/26 tax year, including the latest benefit-in-kind (BiK) charges, Class 1A national insurance contributions (NIC) and real-world reporting duties. We draw on current HMRC tables, Office for National Statistics (ONS) data and our daily experience supporting owner-managed businesses across the UK. By the end, you will understand the numbers, the paperwork and the options, so you can decide whether a company vehicle still fits your pay package – or whether it is time to rethink the scheme. Throughout, we link to the original regulations as well as practical resources on our own site, so you have everything in one place.

How company car tax works in 2025/26

Company car tax is a charge on the employee, calculated as income tax on the annual BiK value, and a charge on the employer, paid as Class 1A NIC on that same value. For 2025/26 the facts are as follows.

• Employee income tax: Taxed at 20%, 40% or 45% on the BiK value, depending on the employee’s marginal rate.
• Employer NIC: 15% of the BiK value.
• BiK value: List price of the car (including accessories) × the relevant BiK percentage.

HMRC publishes the official list price and percentage tables each year. For petrol models emitting 100g/km of CO2, the BiK percentage is 26% in 2025/26, while a pure-electric car is 3%.

The scale of the benefit is significant: the ONS estimates that 840,000 employees received a company car in 2024, costing the Exchequer £1.6bn in lost income tax and NIC.

Calculating the benefit in kind

Getting the BiK right reduces queries from HMRC and keeps payroll tidy. Work through these steps.

1. Confirm the P11D list price: The list price is the manufacturer’s recommended retail price when the car was first registered – not what you paid. It includes delivery charges, optional extras and VAT.
2. Identify the fuel type: Petrol, diesel and electric cars each have their own CO2 bandings. Diesels attract a four percentage-point supplement unless they meet RDE2 standards.
3. Look up the CO2 band: HMRC’s 2025/26 table runs from 3% for cars emitting 0g/km CO2 (only those meeting the zero-emission range test) up to 37% for the highest emitters.
4. Apply reductions for part-year availability: If the car is available for only part of the tax year, pro-rate the BiK value by the number of days.
5. Settle fuel benefit separately: Company-paid fuel for private journeys triggers an extra BiK, based on a fixed multiplier of £28,200 for 2025/26, regardless of engine size.

Average BiK per car rose to £4,950 in 2024 according to statistics (ONS, 2024), underlining the importance of an accurate method. We recommend building a template or using HMRC’s BiK calculator for each vehicle.

Reporting and paying company car tax

Once the figures are agreed, you must do the following.

• Update payroll: Include the BiK in the employee’s taxable pay using PAYE tax codes, or submit a P11D by 6 July after the end of the tax year.
• File the P11D(b): Summarises all benefits and triggers the employer’s Class 1A NIC payment due by 22 July (electronic) or 19 July (cheque).
• Maintain mileage records: HMRC can request evidence that fuel used for business trips was reimbursed at the advisory fuel rates. Keeping a digital log offers the simplest defence.

Late or incorrect returns attract penalties of up to £300 per P11D plus daily charges. A recent HMRC compliance drive saw an additional £146m raised from benefit-in-kind inquiries (OBR, 2024).

Electric and ultra-low-emission cars

The headline rate of 3% for zero-emission cars remains unchanged until April 2026, rising just one percentage point a year thereafter. For hybrids emitting 1-50 g/km, the BiK percentage increases in 2025/26 as the electric-only range falls:

• 130 miles or more – 3%
• 70-129 miles – 6%
• 40-69 miles – 9%
• 30-39 miles – 13%
• under 30 miles – 15%.

As a result, adding a plug-in hybrid SUV to a director’s remuneration can still save tax, but the gap between electric and low-emission petrol models is widening. Employers should also budget for home-charging reimbursements and workplace charging points – both remain tax-free when supplied correctly. Full guidance is on the HMRC site.

Cost-saving strategies for employers

• Salary sacrifice arrangements: The employee gives up gross pay in exchange for a low-emission car. Provided the arrangement follows HMRC’s optional remuneration rules, the BiK value replaces the sacrificed salary. Employers can save up to 15% overall once NIC savings and scale charges are compared.
• Pool cars: Vehicles kept at the business premises and available to multiple employees for business journeys are not treated as benefits – but the rules are strict. We recommend keeping a booking log and returning keys to a central point after each trip.
• Mileage allowances instead of fuel cards: Paying the HMRC approved rate of 45p per mile (first 10,000 miles) and 25p thereafter avoids the fuel benefit charge entirely.
• Reviewing under-used cars annually: Cars that spend long periods idle often cost more in Class 1A NIC than they deliver in staff satisfaction. Holding an annual review in February gives time to terminate leases before the next tax year.

Common pitfalls and how to avoid them

• Incorrect CO2 data: Always use the type-approval figure on the V5C, not marketing literature.
• Forgetting accessories: Leather seats and upgraded infotainment count towards the list price.
• No adjustment for employee contributions: If the driver makes a payment for private use, deduct it from the BiK value before payroll is finalised.
• Fuel cards left active: Cancelling a card late in the tax year can still leave a fuel benefit in place for the whole period.
• Missing P46(car) notifications: Tell HMRC within 28 days when a car is handed over or withdrawn to avoid incorrect tax codes.

Regular checks save penalties and demonstrate reasonable care – something HMRC views favourably during reviews.

Next steps for employers

Company car tax may never be simple, but with clear calculations, disciplined record-keeping and regular reviews, it can remain a valued part of the remuneration package. Our team at Stapletons keeps the 2025/26 BiK tables and advisory fuel rates at hand, so you do not have to. If you want to assess whether your fleet still stacks up – or if switching to cash allowances might be wiser – we are ready to run the numbers.

Talk to us about company car tax today and keep your benefits working for you and your employees.