Taxation of company cars in 2025/26 and beyond

Employees with a company car available for their private use pay tax on the benefit. The amount that is charged to tax is a percentage of the list price of the car and any optional accessories, as adjusted to reflect any contribution the employee makes towards the cost. This benefit is known as the Benefit in Kind (BIK) and is one of the most common areas where employees misunderstand their tax position. Understanding how company car taxation works is essential for both employers and employees, particularly as the rules continue to evolve with environmental considerations at the forefront of HMRC policy.

How the company car benefit is calculated

The taxable benefit is determined by multiplying the car’s list price (including optional extras) by a percentage rate, which varies depending on the vehicle’s CO₂ emissions and fuel type. For the 2024/25 tax year, the percentage rate for petrol and diesel cars ranges from 11% to 37%, depending on emissions levels. Electric vehicles currently benefit from the lowest rates, starting at just 2% for pure electric cars, although this is set to increase gradually over the coming years.

If the employee contributes towards the cost of the car or its running costs, this reduces the taxable benefit proportionally. However, only contributions made by the employee themselves count — employer contributions do not reduce the BIK calculation.

Changes coming for ultra-low emission vehicles

From April 2025, the headline rate for zero-emission vehicles (ZEVs) will increase from 2% to 5%. This change reflects HMRC’s shift in policy as more people adopt electric vehicles and the government seeks to maintain tax revenue. Additionally, the lower threshold for CO₂ emissions that currently attracts the 2% rate is being tightened, meaning fewer traditionally fuelled cars will qualify for the most favourable rates.

Directors and company owners should note these changes when making fleet decisions or reviewing salary sacrifice arrangements. Whilst electric vehicles remain far more tax-efficient than their petrol and diesel counterparts, the gap is narrowing. For a £40,000 electric car, the BIK at 5% would equate to £2,000, still considerably lower than a similarly priced petrol vehicle.

What about fuel benefit and mileage?

A separate fuel benefit charge applies if the employer provides fuel for private use, calculated at a fixed percentage of the car’s list price. For 2024/25, this rate is 29% for petrol and diesel vehicles. Many employees find it more economical to decline fuel benefit and pay for their own petrol or diesel, particularly if their private mileage is limited.

It’s worth noting that the fuel benefit applies regardless of actual fuel consumption — it’s a fixed charge based on the vehicle’s value. Employees should review this annually to determine whether opting out is worthwhile.

Employee business mileage in a company car is not a taxable benefit, but records must be kept to support this claim. From 1 April 2025, the approved mileage allowance for company cars is 45p per mile for the first 10,000 miles and 25p per mile thereafter.

Reporting and compliance

The company car benefit must be reported to HMRC using forms P11D (for director and employee benefits) and included in the employee’s Self Assessment tax return if they complete one. Employers must ensure accurate vehicle data is recorded, as the DVLA can confirm emissions figures. Failure to report correctly can result in penalties, particularly where high-value vehicles are involved.

For contractors and sole traders providing their own vehicles for business use, the position differs significantly — you may claim allowable expenses under the Capital Allowances regime or simply use the simplified expenses method.

Planning ahead for 2025/26

As we approach the next tax year, now is an excellent time to review company car policies. If your business is considering fleet renewals, understanding the upcoming BIK changes can help you make cost-effective decisions. Electric vehicles, whilst more expensive upfront, may offer substantial savings over the lifecycle when tax efficiency is factored in.

Employees should also review their current arrangements to ensure they understand what they’re paying tax on and whether changes might be beneficial.

Company car taxation can appear complicated, but with proper understanding and planning, you can minimise the tax burden legitimately. The key is staying informed and reviewing your arrangements annually.

For tailored advice, contact Severn Accounting — we’re here to help.