Company Car Tax Explained: BiK Rates, P11D Value & a Worked Example

Providing a company car is a common perk, but it comes with a tax cost for both the employee and the employer. Here’s how company car tax actually works, and a worked example showing the numbers, whether the car in question is a new car or a used one.

What is company car tax?

When an employer provides a car available for an employee’s private use (not just business journeys), it counts as a taxable Benefit-in-Kind (BiK). The employee pays income tax on the value of that benefit, and the employer pays National Insurance on it too.

The tax isn’t a flat fee, it depends on the car’s list price and, crucially, its CO2 emissions.

The P11D value

The starting point is the car’s P11D value, broadly its list price including VAT, delivery charges, and most factory-fitted accessories, but excluding the first year’s vehicle registration fee and road tax. This is the manufacturer’s list price basis, not whatever discount was actually negotiated on purchase. It applies in the same way whether the car is bought new or is a used company car, the calculation always starts from the original list price when new, not the price actually paid for a second-hand vehicle.

The BiK percentage band

HMRC sets a Benefit-in-Kind percentage, often called the BiK rate, based on the car’s CO2 emissions (and, for hybrids, its electric-only range). The bands are structured so:

• Zero-emission (fully electric) cars sit in the lowest bands
• Low-emission and plug-in hybrids with a longer electric range get progressively better rates
• Petrol and diesel cars with higher emissions sit in higher bands, up to a maximum percentage for the highest emitters

This is the main reason electric vehicles have become a popular company car choice, the tax implications of choosing an EV over a petrol or diesel model can mean paying only a fraction of the tax on an equivalent combustion-engine car. As more EVs and electric cars have entered the market, the gap between the BiK rate on a zero-emission electric car and a comparable petrol or diesel model has become one of the biggest single factors in company car choice.

Worked example

Take a car with a P11D value of £30,000, sitting in a 20% BiK band:

1. Taxable benefit = £30,000 x 20% = £6,000
2. Employee’s tax = £6,000 x 20% (basic rate) = £1,200 per year

A higher-rate taxpayer with the same car would pay £6,000 x 40% = £2,400 per year instead, the taxable benefit figure stays the same, but the tax bill depends on which income tax band or bracket the employee falls into. Someone who moves between tax bands during the year (for example, a pay rise pushing them from basic rate into higher rate) will see their company car tax liability change too, since it’s calculated against whatever rate applies to their income.

How it’s reported

The taxable benefit is reported to HMRC on a P11D form (or payrolled directly through PAYE, if the employer has registered to do so), as GOV.UK’s guidance on tax on company benefits sets out. It’s added to the employee’s income for tax purposes, either adjusting their tax code or being included in their Self Assessment if they complete one. Reporting follows the tax year (6 April to 5 April), and the BiK percentages themselves are reviewed and can change from one tax year to the next, so the same car can attract a different tax band over time.

If the employer also provides fuel for private mileage in the company car, that’s a separate fuel benefit charge, taxed in the same way as the car itself but calculated using a fixed fuel benefit multiplier rather than the car’s own P11D value. Many employees with company cars ask their employer to cover only business fuel, or fund private fuel themselves, specifically to avoid this extra tax.

The employer’s cost: Class 1A National Insurance

The employee’s income tax isn’t the only cost. The employer also pays Class 1A National Insurance on the same taxable benefit value, at the standard Class 1A rate. This is a genuine cash cost to the business on top of providing the car itself, and it’s easy to overlook when working out the true cost of a company car scheme. Because both the employee’s tax bill and the employer’s National Insurance cost are driven by the same P11D value and BiK rate, choosing a lower-emission car reduces cost on both sides at once, not just the employee’s payslip.

Company car vs car allowance or salary sacrifice

A company car isn’t the only way employers support employees who need a vehicle. Some offer a car allowance instead, a cash sum added to salary that the employee uses to buy or lease their own car, which is simply taxed as ordinary income rather than under the Benefit-in-Kind rules. Others use a salary sacrifice arrangement, where the employee gives up part of their salary in exchange for a car provided by the employer, in which case the car still counts as a taxable benefit and BiK still applies. Which option works out cheaper depends on the specific car, its emissions, and the employee’s own income tax band, there’s no single answer that suits every situation, which is why many employers let staff choose between a company car and a cash alternative.

Working out the numbers for a specific car

Because the BiK percentage changes with CO2 emissions and electric range, and rates are reviewed periodically, the actual tax due varies significantly between models. Our company car tax calculator works out the employee and employer cost for a specific car and P11D value.

Getting company car reporting right

P11D and Class 1A reporting has firm deadlines each tax year, and errors can mean penalties for both employer and employee. Our payroll service handles Benefit-in-Kind reporting alongside your regular payroll, so company car and other benefits are reported correctly and on time.