Company cars remain a valued perk in construction, engineering and fast-growing tech firms, yet the tax on company cars often feels like a maze of rules rather than a simple benefit. Employers want to reward talent and keep projects moving, while employees want reliable transport that does not swallow their take-home pay. Against the backdrop of shifting environmental policy and changing staff expectations, the stakes for getting compliance right are rising.
HMRC’s latest benefits-in-kind (BiK) release shows 760,000 employees received a company car in 2022/23, up 40,000 on the previous year, while the taxable value fell to £3.6bn (HMRC, 2024). At the same time, 29% of those cars were fully electric, highlighting a rapid transition that the tax rules now reflect. From April 2025 the BiK rate for zero-emission cars moved from 2% to 3% and will rise by one percentage point each year until 2028/29. Whether you already run a fleet or you are exploring a salary-sacrifice scheme for the first time, understanding tax on company cars can protect margins and improve staff engagement.
Below we answer the questions we hear most often from clients, set out 2025/26 BiK rates and fuel thresholds, and outline practical steps to keep tax exposure – and administrative burden – to a minimum.
How is tax on company cars calculated?
The taxable value – called the cash equivalent – is worked out as follows.
- List price: The manufacturer’s list price when the car was first registered.
- CO₂ emissions band: HMRC publishes an “appropriate percentage” table each April. The higher the emissions, the higher the percentage.
- Fuel type: Diesel, petrol, hybrid, electric or another alternative fuel.
- Availability adjustment: Reduce pro-rata if the car is only available for part of the year.
Multiply the list price by the appropriate percentage to arrive at the benefit value, then apply the employee’s marginal income tax band to find their annual charge. The employer pays Class 1A national insurance contributions (NIC) at 13.8% on the same benefit. HMRC’s online calculator is a quick sense check when specifications change mid-year (HMRC calculator).
Benefit-in-kind rates for 2025/26: What’s changed
The frozen BiK table finally moves in April 2025. Key points are:
- zero-emission vehicles – 3%.
- 1-50 g/km CO₂ split by electric range – 3-13%
- petrol and diesel bands start at 15% (up to 50g/km) and rise by 1 percentage point for every 5g/km to a maximum of 37% (diesel cars failing real driving emissions step 2 (RDE2) tests still attract a 4 percentage-point supplement).
These shifts keep tax on company cars broadly stable for low-emission models but tighten the screw on older diesels. Firms with mixed fleets should revisit salary sacrifice assumptions now to avoid an April surprise.
Electric vehicles and ultra-low emissions: Are they still a perk?
Electric cars remain compelling even at a 3% BiK rate. On a £45,000 list price, the employee pays £405 at the basic rate or £1,215 at the higher rate – a fraction of the charge on a comparable diesel estate. Employers save 13.8% Class 1A NIC on the same lower benefit, while salary sacrifice can cut employer NIC further and improve staff retention.
- Whole-life cost: Electricity typically costs 6-9p per mile versus 14-22p for petrol.
- Capital allowances: New zero-emission cars qualify for 100% first-year allowances until April 2026.
- Congestion charges: Many city schemes offer discounts or exemptions, easing project logistics.
With construction sites increasingly located in clean-air zones, aligning fleet policy with sustainability targets can deliver reputational as well as tax savings.
Fuel benefit: Opt in or pay your own?
The separate fuel benefit often tips the scales against company-paid fuel. For 2025/26 the fixed fuel benefit multiplier is £28,200. Multiply this by the same CO₂ percentage used for the car. Even at 20% emissions, the benefit is £5,560, triggering £2,224 income tax at 40% – far more than many drivers spend on private fuel.
- Annual mileage: Calculate likely personal miles before accepting fuel.
- Reimbursement rates: Employers can repay private fuel at published advisory fuel rates to keep both parties tax-neutral.
- Electric charging: Home charging reimbursed at cost is not a taxable benefit, but workplace charging is exempt if certain conditions are met.
Reviewing the figures each March prevents an unexpected tax bill later.
Reducing the bill: Practical steps for employers and employees
- Vehicle selection policy: Cap CO₂ at 50 g/km – offers more choice than fully electric while keeping BiK in single digits.
- Salary sacrifice scheme: Staff give up gross pay equal to the lease cost; savings are income tax, NIC and, for the employer, Class 1A NIC.
- Contribution agreements: Employee contributions toward the lease reduce the benefit value pound-for-pound.
- Shared pool cars: Qualifying pool vehicles must be kept mainly at the workplace, made available to multiple employees and not taken home overnight.
Payroll and paperwork: Keeping HMRC onside
- P11D reporting: Submit by 6 July and pay Class 1A NIC by 22 July.
- Payrolling benefits: Register online before 5 April if you want real-time collection from 6 April.
- Evidence files: Keep copies of leases, CO₂ certificates, employee agreements and mileage logs for six years.
- Quarterly reviews: Check leavers, new joiners, car swaps and changes in private use.
Digital record-keeping streamlines PAYE inspections and reduces the risk of back-dated liabilities. Our team can integrate fleet data with payroll to automate adjustments.
Tax on company cars: Worked examples
- Electric hatchback (list £35,000, 0g/km): BiK £1,050; employee tax £210/£420/£472 (basic/higher/additional rates); employer NIC £145.
- Hybrid SUV (list £42,000, 60g/km, 35-mile electric range, 8% rate): BiK £3,360; employee tax £672/£1,344/£1,508; employer NIC £463.
- Diesel pickup (list £32,000, 180g/km, 37% plus 4-point diesel supplement = 37% cap): BiK £11,840; employee tax £2,368/£4,736/£5,328; employer NIC £1,634.
These figures underline why fleet mix drives total reward costs.
Next steps for efficient fleet decisions
The tax on company cars regime will keep evolving as the government balances revenue with its net-zero pledges. By acting early – reviewing fleet mix, refreshing policies and communicating clearly with staff – you can turn a potential headache into a genuine incentive. Our sector insight means we understand the site-to-site travel demands of construction teams, the time-critical needs of engineers and the growth mindset of tech entrepreneurs. If you would like tailored modelling, a salary-sacrifice feasibility study or hands-on help with P11Ds, speak to us. A short conversation now can avert an unexpected tax charge later.
Ready to optimise your tax on company cars position? Get in touch with our specialist team for a no-obligation review – and keep your fleet working hard, not your tax bill.