Company car rules

Corporation tax relief

Corporation tax relief is based on the cars registered CO₂ emissions, and if this is 50g/km or less then the tax is more favourable.

Brand new electric cars receive 100% first year allowances and can be bought outright or under a HP/PCP deal.

Where you are buying a second-hand electric vehicle, or a new/second hand car with CO₂ emissions of 50g/km or less, you will only receive main rate allowances (currently 18%) year on year on a reducing basis until the balance of the pool is used.

Cars with emissions above 50g/km will only receive special rate allowances (currently 6%) each year.

Commercial vehicles, such as vans, fall outside the definition of a car so can obtain beneficial allowances, such as full-expensing (if purchased new) or Annual Investment Allowances (AIA) when bought second hand.

The rules for vehicles on lease or hire, are slightly different. You will be entitled to full tax relief on the monthly payments, but where the emissions exceed 50g/km there will be a 15% restriction on the relief available, including any repairs costs of these vehicles.

Running costs and repairs

The costs of running a company car can be included the company expenses, and tax relief can be claimed on these. This includes insurance premiums, road tax and repairs/servicing.

Fuel costs can also be claimed, however is subject to personal tax due to the personal benefit - as discussed below.

VAT registered businesses

Similarly, the rules on reclaiming VAT on company cars are based on hire or purchase.

Where a car is purchased, VAT is not reclaimable as the vehicle has insinuated personal use, whereas if this is a hire agreement, 50% of the monthly VAT can be reclaimed.

VAT can however be reclaimed in full for qualifying vans or other commercial vehicles.

Benefit in Kind (BIK)

As company cars have deemed personal use, the employee(s) for whom the car is made available is therefore taxed on the benefit of that use.

The BIK value is calculated based on the car’s registered CO₂ emissions, list price at new (including accessories) and fuel type (petrol, diesel, hybrid, electric).

As a general rule the lower the CO₂ emissions, the lower the BIK rate. For electric cars, the rate is typically much lower and is 3% in 2025/26.

Hybrid cars are slightly more complicated as the BIK is based on the car having 50g/km or less emissions, together with the electric range of the vehicle. Again, these start from 3% but very quickly change based on the electric range and can be as high as 15%.

Petrol and diesel cars, however, are much more likely to have high emissions and you can therefore see rates as high as 37%.

For example, a brand-new electric car with a list price of £60,000 will have a benefit of £1,800 a year (£60,000 x 3%) in 2025/26. The tax on this will be £360 for basic rate taxpayers, and £720 for higher rate taxpayers.

A high emissions petrol/diesel car, falling in the 37% rate, and costing the same amount will have a benefit of £22,200 (£60,000 x 37%) with tax falling due of £4,440 for basic rate taxpayers or £8,880 for higher rate taxpayers.

In addition to the BIK tax charge on the provision of the vehicle, a separate charge may be payable where fuel is provided for private use. The BIK fuel benefit charge is calculated by taking the flat rate fuel benefit amount (£28,200 in 2025/26) and multiplying this by the cars BIK rate.

For example a car with a 37% BIK rate would have a taxable benefit of £10,434 (£28,200 x 37%) which will give raise to tax of £2,086.80 for basic rate taxpayers or £4,173.60 for higher rate taxpayers.

The BIK fuel benefit charge can be avoided where the employee is reimbursed, using HMRC approved advisory fuel rates, for only the business travel in their company cars, or the employee reimburses the company for the fuel used for private travel. This does not extend to employees who travel for business in a privately owned vehicle, who come under a different scope of rules.

With the company car charge, personal contributions can be made to reduce the benefit charged. The corresponding tax treatment will depend on whether the contribution is a one-off payment towards the initial purchase of the car - in which it can reduce the list price (up to the cap of £5,000) or is a contribution towards the private use of the vehicle – which will reduce the cash equivalent of the vehicle.

Where the contribution is towards a specific aspect of the car’s running costs (such as insurance) or is to enable the employee to have use of a more expensive car, then the payment is not deductible. Care needs to be taken when drafting agreements to ensure these are structured correctly.

Although no fuel benefit charge will arise where an employee reimburses the entire fuel costs relating to private mileage, a partial reimbursement does not have any effect so an employee contribution towards the costs of private fuel will not result in a pound-for-pound reduction in the taxable amount – as is the case commonly seen with other benefits.

P11d

Under current rules in order to calculate and disclose the benefit of a company car, you will need to complete a form P11d for the 2025/26 tax year and file this by 6 July 2026.

The company will also need to pay employers’ National Insurance on the benefit of 15% by 22 July 2026 for electronic payments. The income tax charge for the employee will usually be collected through PAYE by HM Revenue & Customs adjusting their tax code. Where an employee is registered for self-assessment, the benefit will also need to be reported on their tax return.

From April 2026, HMRC have confirmed plans to mandate the reporting of benefit in kind via payroll software, thus doing away with P11ds.

Tax rates

To determine your BIK rate please see our tax card, so you can review the rates for any vehicle you are looking at.

If you have not guessed by now, rules on company cars are difficult to navigate and complex, and the paperwork from a car dealer is not any easier. We would also recommend speaking to your accountant or tax advisor to check the tax position of any car before you sign on the dotted line.