Company Car Tax and BIK Rates: Complete UK Employer Guide

Company car tax is one of the most frequently misunderstood benefits in kind for UK employers. Getting the calculation wrong means incorrect P11D reporting, underpaid Class 1A National Insurance contributions, and potential HMRC penalties. With the shift towards electric vehicles accelerating and BIK rates changing annually, staying on top of the rules is essential.

This guide covers how company car tax works, the current BIK percentage rates for 2025/26, how fuel type affects the calculation, and your reporting obligations as an employer.

How company car benefit in kind works

When you provide an employee with a company car that is available for private use, it creates a taxable benefit in kind. The employee pays Income Tax on the benefit value, and the employer pays Class 1A National Insurance at 13.8% on the same amount.

The taxable benefit is calculated as:

P11D value of the car × appropriate BIK percentage = taxable benefit

The P11D value is the list price of the car when new, including delivery charges, VAT, and any factory-fitted accessories. It does not include the first year registration fee or vehicle excise duty. This value stays fixed for the lifetime of the car — it does not reduce as the car depreciates.

BIK percentage rates for 2025/26

The BIK percentage depends entirely on the car's CO2 emissions and fuel type. The government has set these rates through to 2027/28, giving employers visibility for fleet planning.

Diesel supplement

Diesel cars that do not meet the Real Driving Emissions Step 2 (RDE2) standard face a 4% supplement on top of the BIK percentage shown above, capped at the maximum 37%. Most diesel cars manufactured from September 2017 onwards meet RDE2. Check the V5C registration document or ask the manufacturer if you are unsure.

Worked examples

Example 1: Pure electric vehicle

A Tesla Model 3 with a P11D value of £42,000 and zero emissions:

• BIK rate 2025/26: 3%
• Taxable benefit: £42,000 × 3% = £1,260
• Employee tax (basic rate): £1,260 × 20% = £252 per year (£21/month)
• Employer Class 1A NI: £1,260 × 13.8% = £173.88 per year

Example 2: Petrol car

A BMW 3 Series with a P11D value of £38,000 and 130 g/km emissions:

• BIK rate 2025/26: 32%
• Taxable benefit: £38,000 × 32% = £12,160
• Employee tax (basic rate): £12,160 × 20% = £2,432 per year (£202.67/month)
• Employer Class 1A NI: £12,160 × 13.8% = £1,678.08 per year

The difference is stark. The electric vehicle costs the employee £21 per month in tax. The petrol car costs over £200 per month. This is why fleet electrification has accelerated so rapidly.

Car fuel benefit

If you also provide fuel for private use, there is a separate fuel benefit charge. For 2025/26, the fuel benefit multiplier is £27,800. The taxable fuel benefit is calculated as:

£27,800 × BIK percentage = taxable fuel benefit

Using the petrol BMW example above: £27,800 × 32% = £8,896 taxable fuel benefit, resulting in an additional £1,779.20 per year in tax for a basic rate taxpayer.

For electric vehicles, workplace charging provided by the employer is not a taxable benefit. This is another significant advantage of transitioning your fleet to electric.

Payrolling company car benefits

Since April 2023, employers can choose to payroll company car benefits instead of reporting them on P11D forms. Payrolling means the benefit value is added to the employee's pay for tax purposes each month, and HMRC is informed through RTI submissions.

From April 2026, payrolling of benefits in kind becomes mandatory for most benefits. This means you need to have your systems ready to process company car benefits through payroll rather than on annual P11D returns.

See our P11D and benefits in kind guide for the full details on the transition to mandatory payrolling.

Salary sacrifice and electric vehicles

Salary sacrifice arrangements for electric company cars have become extremely popular due to the low BIK rates. Under a salary sacrifice scheme, the employee gives up a portion of their gross salary in exchange for the car. This reduces their taxable income, saving both Income Tax and National Insurance.

However, the Optional Remuneration Arrangements (OpRA) rules mean that for most company cars, the taxable benefit is the higher of the car's BIK value or the salary sacrificed. The critical exception is ultra-low emission vehicles (ULEVs) with CO2 emissions of 75 g/km or less — these are exempt from OpRA and are taxed on the standard BIK value only.

This exemption makes salary sacrifice for electric vehicles exceptionally tax-efficient. An employee earning £45,000 who sacrifices £500/month for a pure electric car with a 3% BIK rate will typically save £150-200 per month compared to buying the same car personally after tax.

For more on how salary sacrifice works, see our salary sacrifice schemes guide.

Reporting obligations

As an employer providing company cars, you must:

• Notify HMRC of any company car provided to an employee using form P46(Car) within 28 days
• Report the benefit on the employee's P11D by 6 July following the tax year (or payroll the benefit through RTI)
• Pay Class 1A NI on the benefit value by 22 July following the tax year
• Keep records of each car's P11D value, CO2 emissions, fuel type, date provided, and any periods of unavailability

Use our Payroll Tax Calculator to model the total cost of company car provision including employer NI.

Key takeaways

Company car tax centres on two numbers: the P11D list price and the BIK percentage determined by CO2 emissions. Electric vehicles attract dramatically lower BIK rates (3% in 2025/26) compared to petrol or diesel cars, making fleet electrification a powerful tax planning tool for both employer and employee.

Ensure you report car changes to HMRC within 28 days using P46(Car), prepare for mandatory payrolling of benefits from April 2026, and review your fleet composition against the current BIK tables annually. For salary sacrifice schemes involving electric vehicles, the tax savings can be substantial — see our salary sacrifice guide for the details.