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Company Cars: Tax and Benefit Charges

If your company provides you with a car that you can use for private journeys, you'll need to pay tax on this benefit. The amount you pay depends on the car's list price, its CO2 emissions, and how much private use you make of it. Understanding how company car tax is calculate...

Introduction

When Does a Car Benefit Charge Apply?

A car benefit charge arises when all of the following conditions are met:

A car is made available to you (or a member of your family or household)
You don't own the car — the company retains ownership
The car is provided because of your employment
The car is available for your private use

"Private use" means any journey that isn't solely for business purposes. Even if you rarely use the car privately, as long as it's available for private use, a benefit charge applies.

Who Is Affected?

The rules apply to employees and company directors. If your employer provides a car to a member of your family or household, you may still be taxed on the benefit unless that person is also an employee and is taxed on it in their own right.

Cash Alternatives

If you're offered the choice between a company car and a cash allowance, the tax treatment depends on your decision. If you keep the car, you pay tax on the car benefit. If you take the cash instead, that cash is added to your salary and taxed as normal income.

What Counts as a Car?

For tax purposes, a "car" is any mechanically propelled road vehicle except:

Goods vehicles (lorries primarily designed to carry goods)
Motorcycles
Invalid carriages
Vehicles not commonly used privately and unsuitable for private use (such as Grand Prix racing cars)

Estate cars and off-road recreational vehicles count as cars, not vans. Double cab pick-ups are classified as cars or vans depending on their VAT treatment.

How to Calculate the Car Benefit Charge

The calculation follows eight steps:

Step 1: Find the List Price

The list price is the price published by the manufacturer, importer or distributor on the day before the car was first registered. This is the price for a brand new car sold in the UK, including:

Standard accessories
VAT and any other relevant taxes
Delivery charges

The list price is not the discounted price you or your employer actually paid. Even for second-hand cars, you use the list price when the car was new.

If no list price exists, you use a "notional price" — the price the car would reasonably have had if a list price had been published.

Special reduction for cars manufactured to run on road fuel gas: If the car was built to run on compressed natural gas (CNG) or liquid petroleum gas (LPG), you can reduce the list price to match the equivalent petrol-only model.

Step 2: Add the Price of Accessories

You must add the cost of "qualifying accessories" — equipment attached to the car that's made available because of your employment and that you don't own yourself.

Qualifying accessories include items like:

Upgraded sound systems fitted by the dealer
Sat-nav systems
Roof racks (even if removable)
Upgraded alloy wheels

Excluded from the accessory calculation:

Accessories you own yourself
Loose items not attached to the car (maps, tools, car rugs)
Mobile phones
Equipment necessarily provided for your job duties (for example, a tow bar required to carry work equipment)
Equipment allowing the car to run on road fuel gas
Equipment to help a disabled person use the car
Security enhancements provided to safeguard your life where your job creates a personal safety threat (such as armoured protection or bullet-resistant glass)

Step 3: Deduct Any Capital Contributions You Made

If you contributed towards the cost of buying the car (not running costs or insurance), you can deduct this amount. The maximum deduction is £5,000.

Step 4: Find the Appropriate Percentage

This is where CO2 emissions come in. Every car has an "appropriate percentage" based on its CO2 emissions. This percentage is applied to the car's value to work out your taxable benefit.

For the 2025/26 tax year, the percentages range from:

3% for fully electric cars (zero emissions)
3% for plug-in hybrid cars with emissions of 1-50 g/km and an electric range of 130 miles or more
Up to 37% for cars emitting 170 g/km or more

The percentage increases in bands based on CO2 emissions. Plug-in hybrids are treated more favourably if they have a longer electric-only range.

Example percentages for 2025/26:

0 g/km (fully electric): 3%
1-50 g/km with 130+ mile electric range: 3%
1-50 g/km with 70-129 mile electric range: 6%
1-50 g/km with 40-69 mile electric range: 9%
60-64 g/km: 18%
100-104 g/km: 26%
140-144 g/km: 34%
170+ g/km: 37%

The percentages change each tax year. For 2026/27, the rates increase slightly — for example, fully electric cars will be taxed at 4% instead of 3%.

CO2 emissions are measured using either the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) or the older New European Driving Cycle (NEDC). Most modern cars use WLTP figures.

Disabled drivers: If you hold a disabled person's badge and can only drive an automatic car, you may use the list price of the equivalent manual car instead (where available).

Step 5: Calculate the Benefit

Multiply the figure from Step 3 (list price plus accessories, minus capital contributions) by the appropriate percentage from Step 4.

Example: A car with a list price of £30,000, no accessories, and CO2 emissions of 100 g/km would have an appropriate percentage of 26% in 2025/26. The benefit is £30,000 × 26% = £7,800.

Step 6: Deduct for Periods When the Car Was Unavailable

If the car wasn't available for part of the year (for example, if it was provided in August rather than April), the benefit is reduced proportionally.

Step 7: Deduct Payments for Private Use

If you make regular payments to your employer specifically for the private use of the car (not for fuel or insurance), these reduce the benefit. Capital contributions (covered in Step 3) are treated differently from these ongoing private use payments.

Step 8: Adjust for Shared Cars

If you share the car with another employee and both use it for private purposes, the benefit may be apportioned between you.

Tax You Actually Pay

The benefit calculated above is added to your taxable income. The actual tax you pay depends on your income tax rate:

Basic rate taxpayers (20%) pay 20% of the benefit
Higher rate taxpayers (40%) pay 40% of the benefit
Additional rate taxpayers (45%) pay 45% of the benefit

Using the example above (£7,800 benefit), a basic rate taxpayer would pay £1,560 in tax per year (£7,800 × 20%).

What About Fuel?

If your employer also pays for fuel for private journeys, there's a separate fuel benefit charge. This is not covered in detail here but adds to the overall tax liability.

Additional Benefits and Expenses

The car benefit charge normally covers all costs associated with the car, including insurance, road tax, servicing, and repairs. You won't be taxed separately on these if your employer pays for them.

However, if your employer provides a chauffeur (whether for a company car or your own car), this is taxed as a separate benefit on top of the car benefit charge.

Company Vans

Different rules apply to vans. For a van benefit charge to apply from 6 April 2005 onwards, your private use must be more than "insignificant." The calculation method for vans differs from cars.

Reporting and Paying the Tax

Your employer reports your car benefit to HMRC through the payroll system (form P11D). The tax is collected either:

Through an adjustment to your tax code (spreading the tax across the year)
Through Self Assessment if you complete a tax return

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.

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