UK Company Car Tax Explained: 2026/27 BIK Rates & EV Rules

Providing a company car to an employee remains a common and valued benefit, but it carries significant tax implications for both the business and the individual. The tax framework is deliberately structured to incentivise the adoption of low- and zero-emission vehicles. Advising clients effectively requires a detailed understanding of how the Benefit-in-Kind (BIK) is calculated and the specific rates that apply.

How Company Car Tax Works: The Benefit-in-Kind Charge

When an employer provides a car that is available for an employee’s private use, a taxable benefit arises. This is known as the car benefit charge. The legislative framework is contained within the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).

The value of this benefit, on which tax is paid, is calculated using a standard formula:

**Taxable Benefit = P11D Value of the Car × Appropriate Percentage**

• P11D Value: This is the list price of the car, including VAT and any delivery charges, plus the price of any optional extras.
• Appropriate Percentage: This is the critical variable. It is a percentage figure determined primarily by the car’s CO2 emissions and, for some vehicles, its electric-only range.

The employee pays income tax on the resulting taxable benefit amount at their marginal rate. The employer is liable for Class 1A National Insurance contributions on the same value.

The Appropriate Percentage: The Key to Tax Efficiency

The government’s climate change objectives are directly embedded in the company car tax system. The “appropriate percentage” is set on a sliding scale, with lower percentages applied to cars with lower CO2 emissions. This creates a powerful tax incentive to choose electric and ultra-low emission vehicles.

Cars Registered On or After 1 January 1998

For most cars on the road today, the appropriate percentage is determined by their approved CO2 emissions figure.

• Zero-Emission Vehicles (EVs): These cars have the lowest appropriate percentages, making them highly tax-efficient.
• Ultra-Low Emission & Hybrid Vehicles: Cars with CO2 emissions from 1-50g/km also benefit from low rates, with the exact percentage often dependent on their electric-only range.
• Petrol and Higher-Emission Cars: As CO2 emissions rise, the appropriate percentage increases steadily, up to a maximum cap.
• Diesel Cars: A supplement is typically added to the appropriate percentage for diesel cars that do not meet the Real Driving Emissions 2 (RDE2) standard.

Cars Registered Before 1 January 1998

For older cars, where CO2 data may not be available, the appropriate percentage is based on the car’s engine size (cylinder capacity), not its emissions.

Company Car Tax Rates: 2026/27 and Beyond

The government has provided long-term certainty by setting out the appropriate percentages for several years in advance. This allows businesses and employees to make informed decisions about vehicle choices. The rates are scheduled to increase gradually.

The table below summarises the planned BIK rates for zero-emission and ultra-low emission vehicles:

For all other cars (with emissions of 75g/km and above), the rates also increase, reaching a maximum of 39% by the 2029/30 tax year. This maintains a significant tax differential between electric vehicles and traditional internal combustion engine cars.

Key Considerations for Employers

Advising a business on its company car policy involves more than just the BIK charge.

Capital Allowances

A company purchasing a new, zero-emission car for its business can claim a 100% first-year allowance. This provides full tax relief on the cost of the vehicle in the year of purchase. The 100% first-year allowance for qualifying new zero-emission cars has been extended to 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax. Used cars do not qualify for this first-year allowance.

Car Hire

If a company leases a car with CO2 emissions above a certain threshold, the amount of the lease rental payments it can deduct for Corporation Tax purposes is restricted.

Workplace Charging

There is a specific tax exemption that removes any BIK charge for employees who charge their own all-electric or plug-in hybrid vehicles at facilities provided by their employer at or near the workplace. This further encourages the adoption of electric vehicles.

You may find further detailed guidance in HMRC’s Employment Income Manual, particularly from EIM23000 onwards, which covers the car benefit charge.

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