A company car doesn't get taxed like a purchase — it gets taxed as a benefit, because your employer is giving you something of value alongside your salary. That's why the sums look nothing like a normal car price, and why two people in the same job can end up with very different bills depending on the car they picked.
The three numbers that decide your bill
Every company car tax calculation comes down to the same three things multiplied together:
- P11D value — the car's list price including VAT and extras, not what your employer actually negotiated or paid. This is the starting figure the whole calculation is based on.
- The BIK percentage — set by the car's CO2 emissions (and, for plug-in hybrids, how far it can go on electric power alone). Lower emissions mean a lower percentage.
- Your income tax rate — 20%, 40%, or 45%, depending on your total taxable income for the year.
Multiply the P11D value by the BIK percentage to get the "taxable benefit" — the amount treated as if it were extra income — then tax that amount at your rate. That final figure is your annual company car tax bill.
What the BIK percentage actually looks like
For the 2026/27 tax year, fully electric cars sit at a flat 4% — by far the lowest band available. Petrol and diesel cars run on a sliding scale by CO2 emissions, from around 17% for the cleanest petrol models up to a cap of 37% for the highest-emission cars, with diesel models (that don't meet the latest emissions standard) adding a further 4 percentage points on top, still capped at 37%. Plug-in hybrids sit in their own band, from around 4% up to 16%, depending on how many miles they can travel on electric power alone before the engine kicks in.
That gap is deliberate — it's government policy designed to make low-emission cars noticeably cheaper to run as a company car, and it's the single biggest lever in this whole topic. Two cars at a similar list price can end up with very different tax bills purely because of where they sit on this scale.
A worked example
Take a car with a £35,000 P11D value. At a 4% BIK rate (a fully electric car), the taxable benefit is £1,400 a year — taxed at 20% that's £280 a year, or at 40% it's £560. The same car at a 30% BIK rate (a mid-range petrol car) has a taxable benefit of £10,500 — taxed at 20% that's £2,100 a year, and at 40% it's £4,200. Same price of car, same salary, dramatically different bill — purely down to the emissions band.
Common things people get wrong
- Forgetting the fuel benefit charge. If your employer also covers private fuel, that's a separate taxable benefit on top of the car itself — it doesn't come free just because the car's tax is low.
- Assuming this year's rate stays the same next year. BIK percentages are reviewed and can shift at future Budgets, particularly for electric cars as they become more common. Always check the current year's rate rather than assuming.
- Treating salary sacrifice the same as a standard company car. The mechanics of the tax are similar, but salary sacrifice also affects your gross pay and pension contributions — worth checking both sides before assuming it's a straightforward swap.
This article is general information, not personal financial or tax advice. BIK percentages and thresholds shown are for the UK 2026/27 tax year as published by HMRC and may change at future Budgets — always check gov.uk for the current rates before making a decision, or speak to a qualified adviser.
