Benefit-in-Kind (BiK) Tax Explained: What a Company Car Costs

Benefit-in-Kind (BiK) tax is what you pay for having a company car available for private use. The sum is simple: P11D value × BiK percentage × your income tax rate. For the 2026/27 tax year a £40,000 electric car sits at 4%, costing a 40% taxpayer £640 a year - roughly £53 a month.

What will company car tax actually cost me?

Expect anywhere from around £25 a month to well over £400 a month, depending almost entirely on the car's CO2 emissions and your tax band. In 2026/27, a £40,000 electric car costs a 20% taxpayer £26.67 a month and a 40% taxpayer £53.33. The same £40,000 as a 120g/km petrol costs £200 and £400 a month respectively.

That spread is the whole story of Benefit-in-Kind. Two colleagues can drive cars with identical price tags and one pays eight times what the other does, purely because of the tailpipe. So if the question in your head is "can I afford this company car?", the honest answer is: work out the percentage band first, because it swings the answer more than the car's price does.

Here's the quick reckoner for a car with a £40,000 P11D value in the 2026/27 tax year.

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How is Benefit-in-Kind tax calculated?

Three numbers, multiplied together. Take the car's P11D value, multiply by the HMRC appropriate percentage for its CO2 emissions, then multiply by your marginal income tax rate. The result is your annual tax on the benefit. Divide by twelve for a monthly figure.

Step 1: find the P11D value

The P11D value is the car's list price for tax purposes - the manufacturer's published price including VAT, delivery and any factory-fitted options, but excluding the first registration fee and vehicle excise duty (road tax). It is named after form P11D, the return employers use to report taxable benefits to HMRC.

The point people trip over: discounts don't count. If your business leases a car and the funder secured a substantial discount, HMRC still uses the published list price. That's worth saying plainly, because it's the single most common misunderstanding we hear on the phone.

Step 2: find the appropriate percentage

According to HMRC, the appropriate percentage is set by the car's CO2 emissions, and for plug-in hybrid vehicles (PHEVs - cars with both an engine and a battery you charge from the mains) also by the official electric-only range. HMRC rounds the exact CO2 figure down to the nearest 5g/km, so 188g/km is treated as 185g/km.

Step 3: apply your income tax rate

The taxable benefit is added to your income, so it's taxed at your marginal rate - 20%, 40% or 45% in England, Wales and Northern Ireland. If the benefit pushes you across a threshold, part of it is taxed at the lower rate and part at the higher. Scottish taxpayers apply the Scottish rates instead.

Does leasing the car change the tax?

No. HMRC applies the same rules whether the business buys the car outright or takes it on Business Contract Hire. The charge is always based on the list price when the car was new. Leasing changes the company's cash flow and its tax and accounting treatment, not the driver's personal BiK position.

What are the BiK rates for the 2026/27 tax year?

For 2026/27, fully electric cars are taxed at 4% of P11D value. Plug-in hybrids emitting 1-50g/km are banded by electric range, from 4% (130 miles or more) to 16% (under 30 miles). Petrol and diesel cars run from 17% at 51-54g/km up to the 37% cap at 155g/km and above.

A quirk worth knowing for 2026/27: the bands below 75g/km rose by one percentage point while everything at 75g/km and above was held flat, so a car at 70-74g/km and one at 75-79g/km both sit at 21%.

What about the diesel supplement?

Diesel cars that don't meet the Real Driving Emissions Step 2 (RDE2) standard carry a 4 percentage point supplement on top of their CO2-based percentage, capped so the total never exceeds the maximum for the year. Most diesels registered in recent years are RDE2-compliant, so in practice the supplement mainly catches older vehicles. Diesel plug-in hybrids are exempt from it.

Worked examples: electric vs petrol company car

Take two cars, both with a £40,000 P11D value, both driven by a 40% taxpayer in the 2026/27 tax year. The electric one is taxed at 4%: £40,000 × 4% = £1,600 taxable benefit, × 40% = £640 a year. The 120g/km petrol is taxed at 30%: £40,000 × 30% = £12,000, × 40% = £4,800 a year.

Over a three-year contract, that higher-rate driver pays £1,920 in BiK on the electric car and £14,400 on the petrol. £12,480 of difference on cars with the same sticker price. Figures are illustrative and use round numbers - your own P11D value will rarely land on a neat £40,000.

What if I only have the car for part of the year?

The charge is time-apportioned. Take delivery on 6 October and you're taxed on roughly half the annual benefit for that tax year. The same applies at handback, and periods where the car is genuinely unavailable for 30 consecutive days or more can also reduce the charge.

How do BiK rates change up to 2029/30?

Electric company car rates are legislated through to 2029/30: 4% in 2026/27, 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30, where they cap. The bigger change lands on plug-in hybrids - from 2028/29 the electric-range bands disappear entirely and every 1-50g/km car is taxed at 18%, then 19% in 2029/30.

According to HMRC's published measure on company car taxation for 2028/29 and 2029/30, all bands other than the 1-50g/km group rise by one percentage point a year across those two years. If you're signing a three or four-year contract on a plug-in hybrid, model the 2028/29 jump into your numbers now rather than being surprised by it in year three. A PHEV taxed at 9% today could be sitting at 18% before the contract ends - double the bill on the same car.

One temporary quirk to be aware of: for PHEVs first registered and made available between 1 January 2025 and 5 April 2028 that fall under emissions standards other than Euro 6d-ISC-FCM or Euro 6e, HMRC treats the CO2 figure as a nominal 1g/km for BiK purposes. It's an easement to stop stricter test results pushing drivers into higher bands mid-contract.

What does Benefit-in-Kind cost the employer?

The employer pays Class 1A National Insurance at 15% on exactly the same taxable value the employee is taxed on. On a £40,000 electric car at 4%, that's £240 a year. On the £40,000 petrol at 30%, it's £1,800 a year. There's no employee National Insurance on a company car benefit.

Reporting matters too. Benefits are declared on form P11D after the tax year ends, with the P11D due by 6 July and Class 1A National Insurance payable by 22 July. Many employers already payroll benefits in real time instead, and payrolling of benefits in kind becomes mandatory from April 2027 - so if you're still doing an annual P11D exercise, that's a change to prepare for.

For the company, the vehicle's running cost sits separately from BiK. On Business Contract Hire, the proportion of rentals you can set against profits depends on the car's CO2, and VAT treatment differs again - we cover that in the guides on reclaiming VAT on a business lease and how business leasing affects your tax and accounts.

BiK on vans, pick-ups and employer-paid fuel

Vans are taxed on a flat charge, not a percentage of list price. For 2026/27 the van benefit charge is £4,170, so a 20% taxpayer pays £834 a year and a 40% taxpayer £1,668. Zero-emission vans attract no benefit charge at all. Employer-provided private fuel is a separate charge on top.

Company vans

The flat charge only applies where there is private use beyond ordinary commuting - genuinely incidental private use doesn't trigger it. Where an employer also provides fuel for private journeys in a van, the van fuel benefit charge for 2026/27 is £798, which costs a 20% taxpayer £159.60 and a 40% taxpayer £319.20 a year. If you run a commercial fleet, our guide to van leasing for business covers the wider picture.

Double cab pick-ups

Double cab pick-ups registered from 6 April 2025 are treated as cars for BiK, not vans, where private use is permitted - meaning list price and CO2 drive the charge. Transitional arrangements apply where the vehicle was purchased, leased or ordered before that date. Given that most double cabs emit well over 155g/km, the move is expensive: at the 37% cap, a £45,000 pick-up costs a 40% taxpayer £6,660 a year.

Free fuel is usually a bad deal

The car fuel benefit is calculated by multiplying a fixed figure - £29,200 for 2026/27 - by the same appropriate percentage used for the car itself. On that 120g/km petrol at 30%, that's £8,760 of taxable benefit, costing a 40% taxpayer £3,504 a year. You'd need to be doing a lot of private miles to spend that much on petrol. Most drivers we speak to are better off reimbursing private fuel and killing the charge entirely. Note there's no fuel benefit charge for electricity used to charge an electric company car.

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How can you reduce your Benefit-in-Kind bill?

Four levers, in order of impact: pick a lower-emission car, pick a lower P11D value, make a capital contribution or pay for private use, and drop employer-paid private fuel. Choosing an EV over a mid-range petrol typically cuts the bill by more than 80% - nothing else comes close.

What about pool cars?

A genuine pool car carries no BiK charge, but HMRC applies the conditions strictly: available to more than one employee, not ordinarily used by one to the exclusion of others, not normally kept at or near an employee's home, and private use only incidental to business use. Keep mileage records. Pool car claims are a well-known area for HMRC enquiry, and "it's technically a pool car" rarely survives contact with an inspector if the same person takes it home every night.

Is a company car still worth taking?

For an electric car, almost always - a 4% charge in 2026/27 is small against the cost of funding, insuring and depreciating a car yourself. For a petrol or diesel above about 130g/km, it's much closer, and a cash allowance often wins for anyone who wants an older or cheaper car. Run both numbers before deciding.

A simple decision framework

• Fully electric (4% in 2026/27): take the company car. The tax is minimal and the rates are published to 2029/30, so there's no nasty surprise waiting in year three.
• PHEV with 70+ miles of electric range (6% in 2026/27): attractive now, but check the term. If your contract runs into 2028/29 you'll be paying 18%, so weigh the whole-term cost.
• PHEV with under 70 miles of range (9-16% in 2026/27): only worth it if you genuinely can't live with an EV. You're paying a meaningful premium for a car that still jumps to 18% from 2028/29.
• Petrol or diesel, 51-124g/km (17-30% in 2026/27): workable, especially on a lower list price. Compare hard against a cash allowance.
• Petrol or diesel, 125g/km and above (31-37% in 2026/27): the tax is heavy. Most drivers in this bracket are better off with an allowance and a personal lease, unless the employer's package is unusually generous.

The comparison that actually matters is take-home pay versus take-home pay. Our guide to company car vs car allowance walks through it properly. And if you're self-employed rather than an employee, BiK may not apply to you at all - see leasing as a sole trader.

Frequently Asked Questions

Written by the team at First Vehicle Leasing, a UK vehicle leasing broker with over 25 years' experience arranging business and personal contract hire. FVL is authorised and regulated by the Financial Conduct Authority and is a member of the BVRLA. This guide is reviewed annually against HMRC's published company car tax rates. For help matching a car to a BiK band, call our experts on 0333 003 3325.