UK Company Car Tax (Benefit in Kind) 2026/27: How Much Will It Cost You?

What Is Benefit in Kind (BIK) Tax on a Company Car?

If your employer provides you with a company car that you can use privately -- including commuting -- HMRC treats this as a taxable benefit in kind (BIK). You do not pay income tax on the car itself, but you pay tax on the "notional value" of the benefit. That value is called the BIK or P11D benefit.

Understanding how this works in 2026/27 is important because the rates have been rising steadily, particularly for petrol and diesel vehicles, while electric car BIK remains heavily discounted.

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How Is the Taxable BIK Value Calculated?

The taxable BIK value of your company car is calculated using three figures:

1. P11D value -- the list price of the car including VAT, delivery and any factory-fitted options (excluding the first year registration fee and vehicle excise duty)
2. CO2 percentage -- a percentage linked to the car's CO2 emissions, set by HMRC each year
3. Your income tax rate -- 20%, 40% or 45% depending on your total income

The Formula

Taxable BIK = P11D value x CO2 percentage
Annual tax = Taxable BIK x Your tax rate

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2026/27 CO2 BIK Percentage Bands

HMRC publishes updated percentage tables each year. Below are the key bands for 2026/27:

Diesel cars attract a 4% surcharge on top of these rates (capped at 37%) unless they meet the RDE2 emissions standard.

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Worked Example: Petrol Car vs Electric Car

Example 1: Petrol Car

• Car: Ford Kuga ST-Line
• P11D value: £35,000
• CO2: 130 g/km -- BIK rate: 33%
• Taxable BIK: £35,000 x 33% = £11,550
• Higher-rate taxpayer (40%): £11,550 x 40% = £4,620/year (£385/month)
• Basic-rate taxpayer (20%): £11,550 x 20% = £2,310/year (£192.50/month)

Example 2: Electric Car (Tesla Model 3)

• P11D value: £45,000
• CO2: 0 g/km -- BIK rate: 3%
• Taxable BIK: £45,000 x 3% = £1,350
• Higher-rate taxpayer: £1,350 x 40% = £540/year (£45/month)
• Basic-rate taxpayer: £1,350 x 20% = £270/year (£22.50/month)

The electric car costs a higher-rate taxpayer more than £4,000 less per year in BIK tax despite having a higher P11D value. This is why electric company cars have become extremely popular.

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Electric Car BIK Rates: The 3-Year Roadmap

The government has published BIK rates for electric cars out to 2028/29:

Even at 5% by 2028/29, an EV remains dramatically cheaper in BIK terms than a petrol or diesel car. If you are deciding whether to accept a company car, the type of vehicle matters enormously.

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What Is P11D Value and Who Submits It?

Your employer is responsible for calculating and reporting the P11D value of each company car to HMRC by 6 July following the end of the tax year. They submit a P11D form for each employee who receives a taxable benefit.

The P11D value includes:

• The manufacturer's list price (not what the employer actually paid)
• Any factory-fitted accessories
• VAT

It excludes:

• Vehicle excise duty (road tax)
• First registration fee
• Accessories fitted after the car was first registered (with some exceptions)

If your employer offers fleet discounts, those do not reduce the P11D value -- it always uses list price.

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Does Fuel Benefit Add Extra Tax?

If your employer also pays for your private fuel, HMRC applies a separate fuel benefit charge on top of BIK. In 2026/27, the fuel benefit multiplier is £27,800.

Fuel benefit = £27,800 x CO2 percentage

For the Ford Kuga example above (33% CO2 band):

• Fuel benefit: £27,800 x 33% = £9,174
• Higher-rate taxpayer: £9,174 x 40% = £3,669.60 extra per year

This is a very substantial additional cost. Unless you drive very high private mileage, accepting free fuel is rarely worth it.

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Company Car vs Car Allowance: Which Is Better?

Many employers offer a choice between a company car or a cash car allowance. Here is how to think about it:

Company Car Pros

• No personal capital outlay
• Insurance, servicing and road tax usually covered
• No depreciation risk to you

Company Car Cons

• BIK tax payable every month through PAYE
• Less flexibility -- you drive what the company chooses
• High BIK on high-emission models can be very expensive

Car Allowance Pros

• Taxed as salary but no BIK charge
• You choose the car
• You can claim Approved Mileage Allowance Payments (AMAPs) for business trips

Car Allowance Cons

• Subject to income tax and NI (so a £500/month allowance is worth ~£300 after tax for a 40% taxpayer)
• You bear depreciation, insurance and servicing costs

Rule of Thumb

For electric cars with a 3% BIK rate, taking the company car is usually far cheaper than a cash allowance. For high-emission petrol or diesel cars with BIK rates above 30%, a cash allowance and personal purchase often works out better.

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How Is BIK Collected?

HMRC adjusts your PAYE tax code to collect BIK tax through your payslip, spread evenly across the year. You will see a reduced personal allowance or an addition to your tax code.

For example, if your BIK value is £11,550, HMRC reduces your tax-free code by £11,550, meaning you pay tax on £11,550 more of your income through the year.

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Reducing Your Company Car Tax Bill

There are a few legitimate ways to reduce how much you pay:

• Choose a lower-emission car -- the single biggest lever. Dropping from 130 g/km to 50 g/km halves your BIK rate.
• Choose an electric vehicle -- at 3% BIK, this is the most tax-efficient choice available.
• Make a capital contribution -- if you pay towards the purchase price of the car (up to £5,000), the P11D value is reduced pound for pound.
• Return the car mid-year -- BIK is pro-rated if the car is available for only part of the year.

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Summary: Key Numbers for 2026/27

• Electric car BIK rate: 3%
• Petrol/diesel BIK rates: 25-37% depending on CO2
• Diesel surcharge: 4% (unless RDE2 compliant)
• Fuel benefit multiplier: £27,800
• P11D submission deadline: 6 July 2026

Company car tax can be a significant hidden cost, particularly for higher-rate taxpayers driving high-emission vehicles. Choosing an electric or ultra-low emission car dramatically reduces the bill -- and with the roadmap published out to 2028/29, you can plan ahead with confidence.