Company Car – Tax implications, what you need to know.

Choosing a company car used to be a simple perk. You picked your favourite model, the company paid for it, and you drove away happy. Today, the tax rules are much tighter.

With the 2026/27 tax year now underway, we have updated our guide to help you decide if a company car still makes financial sense. The short answer is that your choice of fuel makes all the difference.

(Updated for the 26/27 tax year)

There are three areas that need to be considered when it comes to company cars, and the tax implications that arise with them.

These are:

• VAT impact

• Personal tax consequences

• Company tax consequences

How does company car tax work?

When your business provides a car for personal use (which includes your daily commute), HMRC views this as a perk. In the tax world, this is known as a Benefit in Kind (BIK). Because it is a benefit, you have to pay income tax on it. The exact amount you pay depends on three key things:

1. The car’s list price
2. The car’s CO2 emissions
3. Your personal income bracket (basic, higher or additional rate taxpayer)

HMRC assigns a percentage to the car based on its emissions. You multiply the list price by this percentage to find the taxable benefit value. You then pay your usual tax rate on that amount.

The current BIK rates for 2026/27

The government is gradually raising rates for lower-emission vehicles, but electric cars still offer massive savings. Here is what you will look at for this tax year:

• Fully Electric Cars (0g/km): The BIK rate is now 4% (up from 3% last year). While it is rising by 1% each year, it remains incredibly low.

• Plug-in Hybrids (1-50g/km): The rate ranges from 4% to 16%. The further the car can drive on pure electricity, the lower your tax bill will be.

• Petrol and Diesel Cars: Rates scale up rapidly based on emissions, reaching a maximum of 37% for the most polluting vehicles.

To put that into perspective, a higher-rate (40%) taxpayer driving a £45,000 electric car will pay around £60 a month in tax. The exact same budget spent on a traditional petrol car could easily cost over £450 a month.

Watch out for the fuel benefit

If your company pays for the fuel you use for private journeys, you face a separate tax charge. For the 2026/27 tax year, HMRC uses a fixed multiplier of £29,200 to calculate this. You multiply this figure by your car’s BIK percentage, and then apply your income tax rate. Unless you do a massive number of personal miles, paying tax on company-provided petrol or diesel rarely works out in your favour. Fortunately, electric charging is treated differently. If your company pays for electricity to charge your electric vehicle, it generally does not trigger this heavy fuel benefit charge.

What about the company’s corporation tax bill?

If you run your own limited company, you also need to think about corporation tax.

The company can claim 100% first-year allowances on brand-new, fully electric cars. This means the business can deduct the entire cost of the car from its taxable profits in year one. This brilliant incentive has just been extended until 31 March 2027. For other vehicles, the rules have tightened. From April 2026, writing down allowances for low-emission cars (1-50g/km) have dropped to 14% each year (down from 18%). For cars with emissions over 50g/km, you can only claim 6% a year. If the company leases the car instead, the monthly lease costs are usually tax-deductible (subject to a 15% restriction if the car emits more than 50g/km).

What about the VAT rules?

VAT on company cars is famously strict, and HMRC keeps a very close eye on it. The rules depend entirely on whether your company buys or leases the vehicle.

• Buying a car: If your business buys a car outright (or through hire purchase), you generally cannot reclaim any VAT at all. To claim the VAT back, the car must be used exclusively for business and never be available for private use. Because commuting counts as private use, reclaiming VAT on a purchased company car is very rare.
• Leasing a car: If you lease the car instead, the rules are much friendlier. You can usually reclaim 50% of the VAT on your monthly lease payments. HMRC blocks the other 50% to automatically cover any personal use.
• Maintenance costs: If your lease includes a separate maintenance package, or if you pay for repairs separately, you can usually reclaim 100% of the VAT on those specific maintenance bills.

Is a company car still worth it?

For most business owners and employees (especially higher-rate taxpayers), traditional petrol or diesel company cars simply cost too much in personal tax. However, fully electric cars are still an absolute winner (even though they are less of a winner than in previous tax years). They combine low personal tax with excellent corporation tax deductions and friendly leasing rules for the business.

Tax rules are full of minor quirks, and the best choice always depends on your exact circumstances.