How Does Company Car Tax Work?

Benefit in Kind is classed as benefits an employee or director receives from a company or employer, which are separate from wages.

The most common Benefit in Kind is a company car, as this type of perk can be personally used by employees, but the company has paid for the initial access to it. Other perks include healthcare and childcare vouchers, among others.

If you are supplied with a Benefit in Kind, tax is payable, which is known as the Benefit in Kind tax. The rates vary depending on the perk, but this amount is payable through an employee’s wages, and companies pay through National Insurance contributions.

If you're lucky enough to be supplied with a company car, then you could be liable to pay a charge known as BIK tax if used for personal driving. But how does company car tax work? Well, the amount you're required to pay will depend on three things:

• Price of your vehicle (P11D value)
• Your annual earnings/tax rate
• CO2 emissions of the vehicle

As with all taxes, the rules are subject to change, so it's vital to check with HMRC on the different BIK rates and values according to recent updates.

Previously, if employees were provided with a company car, company car tax would apply to this perk. However, the company car tax now falls under the umbrella of BIK tax and has specific rules regarding the tax implications for employees.

Essentially, they are the same thing now, and the amount you must pay depends on the vehicle you drive.

Company car tax or Benefit in Kind tax is paid by anyone that uses a business lease car for personal use, including commuting. Tax is paid on the value of the car and can depend on things such as whether you have the vehicle part or full-time and if you paid anything towards it.

People eligible for company cars include:

• Directors/business owners
• Employees

The above individuals can also work for various organisations such as:

• Limited Companies (Ltd)
• Public Limited Companies (PLC)
• Partnerships
• Limited Liability Partnerships (LLP)
• Charities
• Embassies
• Local authorities

Benefit in Kind tax varies depending on a number of factors regarding the type of business lease vehicle you have. It also depends on your personal tax bracket, and this is recorded in a P11D, which the HMRC use to calculate the tax payable.

How is BIK tax calculated?

The benefit-in-kind amount takes into consideration a number of elements, including:

• The list price of the car
• Age of the car
• Fuel type
• CO2 emissions
• Engine size
• Earnings
• Personal tax bracket

You'll need to multiply the car's value by the BIK percentage, then by your personal tax rate to see how much you'll pay. For instance, a £30,000 car with a 30% BIK rate for a 20% taxpayer: £30,000 x 30% x 20% = £1,800 per year.

Working out what you will pay can be confusing, but the simplest way to get an accurate answer is by using the HMRC's company car and car fuel benefit calculator. There's also advice on how to complete each section to ensure you get the correct result.

An important factor to be aware of is the current BIK rates. These change according to the announcements in the Chancellors' budget, so it’s important to always double check before calculating.

CO2 (g/km)	Electric range (miles)	2022-23 (%)	2023/24 (%)	2024/25 (%)	2025/26 (%)
0	N/A	2	2	2	3
1-50	>130	2	2	2	3
1-50	70-129	5	5	5	6
1-50	40-69	8	8	8	9
1-50	30-39	12	12	12	13
1-50	<30	14	14	14	15
51-54		15	15	15	16
55-59		16	16	16	17
60-64		17	17	17	18
65-69		18	18	18	19
70-74		19	19	19	20
75-79		20	20	20	21
80-84		21	21	21	22
85-89		22	22	22	23
90-94		23	23	23	24
95-99		24	24	24	25
100-104		25	25	25	26
105-109		26	26	26	27
110-114		27	27	27	28
115-119		28	28	28	29
120-124		29	29	29	30
125-129		30	30	30	31
130-134		31	31	31	32
135-139		32	32	32	33
140-144		33	33	33	34
145-149		34	34	34	35
150-154		35	35	35	36
155-159		36	36	36	37
160-164		37	37	37	37
165-169		37	37	37	37
170+		37	37	37	37

* The rates above apply to vehicles registered after April 2021.

For more information on Benefit in Kind rates and company car benefits and expenses, visit gov.uk.

Tax on your van depends on whether you use it purely for business or both business and personal reasons. If you are an employee and regularly use your van for private use, then you must pay company car Benefit in Kind tax.

But how does BIK work in relation to vans? Well, vans currently have a flat rate of BIK, which is £3,600. If your company also pays for your fuel, usually with a fuel card, there is an additional BIK standard value of £688. Zero emission vans pay 0% of the rate, meaning the calculation is £0.

If an employee uses the van for private usage but not all the time, there are some ways to reduce this standard value, such as:

• The employee cannot use the van for 30 days in a row
• The employee pays you to privately use the van
• Other employees use the van – in this case, divide £3,600 by the number of employees

If you are an employee of a company that uses a business lease vehicle, the tax you pay on this benefit is taken from your wages. Your employer works out what is owed, and this is automatically deducted via Pay As You Earn (PAYE).

To determine how much you owe in tax, your employer will submit a P11D to HMRC, so you do not have to worry about filing any additional paperwork when getting a company car.

The amount of tax you pay on your company car depends on a number of factors, and these factors can help reduce the tax charge. To help you save on company car tax, consider the following:

• A cheaper vehicle – Opt for a car at a lower price, as this is taken into account in the calculation.
• Switch to an electric vehicle – While EVs are generally more expensive than diesel and petrol cars, they have very low BIK rates, which helps to lower tax charges. For more information, check our guide to the benefits of business EVs.
• Use solely for business purposes – Switching the usage to business travel only means you don't have to pay tax on your company car.
• Avoid adding extras – While adding larger alloys or car mats to your vehicle might be tempting, these costs all add up and increase the vehicle's P11D value.
• Opt for a pickup truck – Some pickups (depending on payload) are classed as light commercial vehicles, and they come under van BIK standard value rates. So, you could save yourself money but still have a usable car for private journeys.

In most cases, employees drive company cars and pay for fuel themselves for private journeys. However, sometimes employers provide what the HMRC classes as ‘free fuel' that can be used for business and personal travel.

If your employer pays for your fuel, this is subject to tax as it's a benefit. This is calculated with a fuel charge multiplier. The additional cost is something to consider as if you're not clocking up the miles, you could end up paying more in tax than you actually spend on fuel.

Company car tax rules and benefits

The rules surrounding company car tax benefits can be confusing. So, to understand the best options for your company, it's helpful to speak with a tax specialist to take full advantage of any ways to save on BIK costs.

Benefit in Kind tax is an important consideration for anyone driving a company car, as it directly affects both employers and employees. By understanding how it works and how it’s calculated, you’re able to make more informed decisions when choosing a business lease vehicle.

If you’re looking for more insights, just head over to our blog. There you can read our self-employed car lease guide or explore how to get a business car lease with bad credit. Or, find out more in our guide: Is a business car lease tax deductible?