Company cars and vehicle benefits in the United Kingdom
Reviewed by Mellow Editorial Team, HR & payroll content team
Company car tax in the UK is a benefit in kind (BIK) — the employer reports it to HMRC, pays Class 1A National Insurance on the value, and the employee pays income tax through an adjusted tax code. Neither party writes a cheque directly; instead, the taxable value flows through payroll and the annual P11D process.
How the taxable value is calculated
The taxable value of a company car is its list price (the manufacturer's published price including options and delivery, but excluding the first registration fee and annual road tax) multiplied by a benefit-in-kind percentage. That percentage is set by HMRC and varies primarily by the car's CO2 emissions and fuel type. Fully electric vehicles attract a much lower BIK percentage than petrol or diesel cars, which is why the split between zero-emission and combustion vehicles matters so much to the tax bill.
Diesel cars that do not meet the RDE2 emissions standard carry a 4% surcharge on top of the standard CO2-based percentage, capped at the maximum BIK rate. The BIK percentages themselves are published by HMRC in advance for several tax years and change annually, so always confirm the current rates directly on GOV.UK when doing any planning.
If the employee contributes a capital sum towards the cost of the car (a "capital contribution"), that amount can reduce the list price used in the calculation, subject to a maximum deduction. Regular employee payments for private use can also reduce the taxable benefit pound for pound.
What the employer pays: Class 1A National Insurance
As an employer, your direct cost is Class 1A National Insurance at 13.8% on the taxable value of the benefit. You do not pay this through the regular payroll run. Instead, it is calculated and reported on the P11D(b) form and paid to HMRC by 19 July (22 July if paying electronically) following the end of the tax year.
For example: if a car has a list price of £30,000 and the applicable BIK percentage is 25%, the taxable value is £7,500. Your Class 1A NI liability on that single car is 13.8% of £7,500 — just over £1,000 per year. Multiply that across a fleet and the cost becomes material quickly.
What the employee pays: income tax through PAYE
The employee does not pay NI on BIK, but they do pay income tax. HMRC adjusts the employee's tax code to collect the liability through payroll across the year, rather than requiring a separate payment. The tax cost depends on the employee's marginal rate: 20% for basic-rate taxpayers, 40% for higher-rate, and 45% for additional-rate.
Using the same £7,500 taxable value: a higher-rate taxpayer pays 40% of £7,500 in additional income tax — £3,000 per year, or £250 per month collected via PAYE. Employees should check their tax code notice to confirm the car benefit has been included correctly.
Reporting: P11D and Real Time Information
Company cars are not reported through the standard Full Payment Submission (FPS) that you submit on or before each payday under RTI. They are instead reported on a P11D for each affected employee, submitted to HMRC by 6 July after the tax year ends. The accompanying P11D(b) declares your total Class 1A NI liability.
You must also give a copy of the P11D (or equivalent information) to the employee by the same 6 July deadline, so they can check the figures against their own tax position.
If a car is provided or withdrawn mid-year, the benefit is pro-rated. You notify HMRC of changes — for example when a car is first made available or returned — using a P46(Car) form, which allows HMRC to update the employee's tax code promptly rather than waiting until the year-end P11D.
Fuel benefit and other vehicle-related charges
If the employer also pays for private fuel, a separate fuel benefit charge applies. This is calculated by multiplying a fixed statutory amount (published by HMRC and updated annually) by the same BIK percentage as the car. The fuel benefit is widely considered poor value for employees unless private mileage is very high, because the taxable amount is significant relative to the actual fuel provided.
Van benefit operates differently: there is a fixed flat-rate taxable value for unrestricted private use of a company van, plus a separate fuel benefit charge if the employer covers private fuel. Electric vans currently attract a much lower benefit charge than conventional vans.
Where employees use their own vehicles for business travel, the employer can reimburse at HMRC's Approved Mileage Allowance Payment (AMAP) rates without creating a taxable benefit, provided payments stay within the published thresholds. Payments above those rates become reportable on the P11D.
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