How Company Car Tax Works in the UK: BIK Rates, EV Savings, and Salary Sacrifice
A company car is one of the most common employee benefits in the UK, but it comes with a tax charge. HMRC treats the private use of a company car as a Benefit in Kind (BIK), and the tax you pay depends on two things: the car's list price (P11D value) and its CO2 emissions. Electric vehicles attract a BIK rate of just 3% in 2025-26, making them dramatically cheaper to run as company cars than petrol or diesel equivalents.
This guide explains the full mechanics of company car tax, provides worked examples at different salary levels, and covers the growing popularity of salary sacrifice arrangements for electric vehicles.
The BIK calculation
The annual taxable benefit of a company car is calculated as:
BIK value = P11D value x BIK percentage
The P11D value is the car's list price including options and delivery charges, minus the first year registration fee and vehicle excise duty. This is a fixed figure based on the car's original list price, not what was actually paid for it. Even if the car was bought secondhand or at a discount, the P11D value uses the manufacturer's list price.
The BIK percentage depends on the car's CO2 emissions measured in g/km. For 2025-26, the key BIK rates are:
| CO2 Emissions (g/km) | BIK Rate | Typical Vehicle |
|---|---|---|
| 0 (pure electric) | 3% | Tesla Model 3, Hyundai Ioniq 5, BMW iX1 |
| 1-50 (plug-in hybrid, 130+ mile range) | 3% | BMW 330e, Volvo XC60 Recharge |
| 1-50 (PHEV, 70-129 mile range) | 5% | Mercedes GLC 300e |
| 1-50 (PHEV, 40-69 mile range) | 8% | Range Rover PHEV |
| 1-50 (PHEV, 30-39 mile range) | 12% | Older PHEV models |
| 51-54 | 15% | Efficient petrol hybrid |
| 55-59 | 16% | Mild hybrid |
| 100-104 | 25% | Small petrol car |
| 130-134 | 31% | Mid-size petrol |
| 160-164 | 35% | Large petrol SUV |
| 170+ | 37% | Large diesel SUV, performance cars |
The maximum BIK rate is capped at 37% regardless of how high CO2 emissions go.
Worked example: electric car, £45,000 salary
An employee on a £45,000 salary is offered a Tesla Model 3 as a company car. The P11D value is £42,990.
BIK value: £42,990 x 3% = £1,289.70
This £1,289.70 is added to the employee's taxable income. As a basic rate taxpayer (20%):
Annual tax cost: £1,289.70 x 20% = £257.94
That is roughly £21.50 per month to drive a £43,000 car. The employee pays no fuel costs if charging at home or at the employer's workplace, and the employer covers insurance, maintenance, and road tax.
Use our company car tax calculator to model your specific car and salary.
Worked example: diesel car, £45,000 salary
The same employee instead receives a BMW X3 diesel with CO2 emissions of 155 g/km. P11D value: £48,000.
BIK rate at 155 g/km: 34%
BIK value: £48,000 x 34% = £16,320
Annual tax cost: At 20%, the employee pays £3,264 per year. But the BIK value of £16,320 pushes total income to £61,320, meaning part of it is taxed at the higher rate (40%). The actual tax cost will be higher: roughly £4,928 once higher rate tax is accounted for.
Compare this with the electric car: £257.94 versus £4,928 per year in BIK tax. The difference is staggering, and it is the primary reason company car fleets are shifting rapidly to electric vehicles.
Employer costs: Class 1A NI
Employers pay Class 1A NI at 15% on the BIK value of company cars. For the electric car example above, the employer pays £1,289.70 x 15% = £193.46 per year. For the diesel, the employer pays £16,320 x 15% = £2,448 per year. This gives employers a strong financial incentive to offer electric vehicles rather than ICE (internal combustion engine) cars.
Salary sacrifice for electric vehicles
Salary sacrifice is an arrangement where an employee gives up part of their gross salary in exchange for a non-cash benefit, in this case a leased car. The tax advantages for electric vehicles through salary sacrifice are exceptional.
How it works:
- The employee agrees to reduce their gross salary by a fixed amount each month (the lease cost of the car).
- The employer uses that salary saving to fund the car lease.
- The employee pays BIK tax only on the higher of: the BIK value (3% of P11D for an EV) or the salary sacrificed. Since the BIK value for an EV is almost always lower than the salary sacrificed, the employee pays BIK tax on the salary sacrifice amount.
Wait. That fourth point needs clarification. HMRC introduced an "Optional Remuneration Arrangement" (OpRA) rule to prevent abuse of salary sacrifice. Under OpRA, the taxable benefit is the higher of the BIK value or the amount of salary given up. For most cars, this means the salary sacrifice amount is the taxable benefit (because it exceeds the BIK value). But for EVs, the BIK value is so low (3%) that even after OpRA, the tax cost is minimal. In many cases, the total cost (sacrifice + BIK tax) is 30-40% less than leasing the same car privately after tax.
Model a salary sacrifice arrangement using our calculator.
Free fuel and private charging
If your employer provides free fuel for private use of a company car, there is an additional fuel BIK charge. For 2025-26, the fuel benefit multiplier is £27,800. The taxable benefit is £27,800 x the car's BIK percentage. For a diesel car at 34% BIK, this adds £9,452 to your taxable income, costing a basic rate taxpayer £1,890.40 per year. Unless you do very high private mileage, it is almost always cheaper to opt out of the fuel benefit and pay for your own fuel.
For electric vehicles, if the employer provides free workplace charging, there is no BIK charge on the electricity. Home charging can also be covered by the employer at up to 8p/mile without triggering a BIK, though this rate is below the actual cost of electricity for most vehicles.
Claiming mileage instead of a company car
Some employers offer a cash allowance instead of a company car, and the employee uses their own vehicle. In this case, the employee can claim Approved Mileage Allowance Payments (AMAP) of 45p/mile for the first 10,000 business miles and 25p/mile thereafter. If the employer pays less than the AMAP rate, you can claim tax relief on the difference. See our mileage allowance calculator for the exact savings.
Frequently asked questions
Does the 3% BIK rate for EVs increase in future years?
The government has confirmed EV BIK rates through to 2027-28. The rate is 3% in 2025-26, 4% in 2026-27, and 5% in 2027-28. Even at 5%, EVs remain significantly cheaper than petrol or diesel company cars (which typically attract 25-37% BIK). These low rates are designed to incentivise the transition to zero-emission fleets.
I have a hybrid car. What BIK rate applies?
Plug-in hybrids (PHEVs) are classified by both their CO2 emissions and their electric-only range. A PHEV with an electric range of 130+ miles and CO2 emissions of 1-50 g/km gets the same 3% rate as a pure EV. A PHEV with a shorter electric range of 40-69 miles gets 8%. Check the specific model's WLTP figures on the V5C document or manufacturer specification sheet to determine the exact BIK band.
My company car has been ordered but not delivered. Do I pay BIK from the order date?
BIK is charged from the date the car is first made available to you, not the order date. If the car is delivered on 1 July 2025, you pay BIK from that date, pro-rated for the remaining nine months of the tax year. The P11D value is fixed at the car's list price at the time of registration.
Can I claim a tax deduction for charging my company EV at home?
There is no automatic tax deduction for home electricity used to charge a company car. Your employer can reimburse you at an Advisory Electricity Rate (AER) of 7p per mile for pure EVs without creating a BIK charge. If you are not reimbursed, you cannot claim the cost as a tax deduction. Some employers install a home charger at their expense, and HMRC does not treat a single-point home charger installation as a BIK if it is required for the role.
Is it worth taking a company car or a cash allowance?
For electric vehicles, the company car is almost always cheaper because of the 3% BIK rate. A cash allowance of £500/month is fully taxed as income (£6,000/year x 40% = £2,400 for a higher rate taxpayer). The EV company car costs a fraction of this in BIK tax. For petrol or diesel cars with high BIK rates, a cash allowance may work out better, particularly if you drive a fuel-efficient personal car and claim mileage. The calculation depends on your tax rate, the specific car, and your annual business mileage. Compare options using our calculator.