Company car tax bands: how much will you pay?

Find out how the UK’s complicated-looking benefit-in-kind system works and how it will influence your tax bill

There are almost 750,000 company car drivers in the UK, according to the latest HMRC figures. It’s a huge population, and the government has spent more than 20 years using tax incentives to encourage them to choose the most efficient vehicles.

Company car tax bands change every year, and the structure has evolved as new technologies have reached the market – but it’s simpler than it looks. 

A company car is a vehicle that’s owned or leased by your employer, primarily for you to use for business trips, but also available for your private journeys outside work hours, including commuting. HMRC classes this as a benefit in kind, which is a catch-all term for any workplace perk provided in addition to your salary. Just like your income, it’s taxable.

*How is company car tax calculated? *

The system affects both employer and employee tax bills, but most drivers will encounter it as a benefit-in-kind (BIK) payment deducted from their salary. There are several factors that can influence how much they pay. 

The baseline is what’s called a ‘taxable value’ for the vehicle. This is a percentage of the list price (also known as the P11D value) based on its tailpipe CO2 emissions and, for plug-in hybrids, its electric-only range. The list price includes options, VAT and delivery charges but excludes the registration fee and the first year of VED. It’s also fixed for life, so it doesn’t reflect discounts for new cars or the lower price of a used one.

BIK is paid as a percentage of that taxable value in line with your income tax band (typically 20%, 40% or 45%, unless you’re in Scotland, which has different rates), and that annual figure is then split equally across your pay packets. For example, a 20% income taxpayer would be liable for 20% of the vehicle’s taxable value per year. The cheaper the car and the lower its CO2 emissions, the less you will pay.

*Which tax band does my company car fit into?*

The start point is finding out how much CO2 it emits and (for plug-in hybrids) the electric-only range, and your fleet manager or vehicle supplier should have that data. Manufacturers switched to a more granular and tougher economy test cycle in 2017, and both figures are affected by options such as larger wheels, sporty bodykits and even heavy panoramic sunroofs. This can cause some models to straddle multiple bands, so it’s important to check.

Those figures will help place the car in one of the following bands, which are used to calculate the taxable value. Company car tax is adjusted every April, and usually increases by a steady 1% point per year. However, bands are currently frozen until April 2025, with slightly different approaches for ultra-low-emissions vehicles (up to 50g/km of CO2) and other models afterwards.

*Calculating the BIK rate on diesel cars*

From being the darling of the environmental lobby, diesel cars are now largely frowned upon, with the result that emissions tests have become tougher for them. The latest – mandatory on all new diesels sold from January 2021 – is called Real Driving Emissions Step 2 (RDE2).

Diesels registered before this date that aren't RDE2-compliant (some gained RDE2 compliance early, so check with your supplier) attract a 4% surcharge on their published BIK rate, up to 37%. Remember that if you’re considering a used diesel as your company car. To be clear, all new diesels are now RDE2-compliant, meaning the 4% surcharge doesn't apply.

Diesel-electric hybrids are classed as alternatively fuelled vehicles so avoid a surcharge whether they're RDE2-compliant or not.

*Calculating the BIK rate on electric cars*

Zero CO2 emissions ensures that electric cars enjoy the lowest BIK rate. In 2020/21, it was actually 0%; but in 2021/22, it rose to 1%; and from 2022/23, it's 2% until the end of the 2024/25 tax year. Either way, EV drivers pay much less company car tax than others.

*Calculating the BIK rate on hybrid and plug-in hybrid cars*

Owing to their low CO2 emissions, hybrid and plug-in hybrid (PHEV) cars enjoy the next lowest BIK rates. However, since their CO2 emissions are linked to them being able to travel on battery power alone, their BIK rates are calculated using a combination of CO2 emissions and official electric-only range.

There are five BIK rate bands for hybrids. Cars with an electric-only range greater than 130 miles attract a rate of 2% in the 2022/23 tax year (although no such hybrid yet exists). At the other extreme, those with an electric range of fewer than 30 miles (a lot of them) fall into the 14% band.

*Examples*

*Vauxhall Corsa 1.2T 100 Ultimate (new) *

The Corsa is a big hit with company car drivers seeking sharp looks, good performance and a low tax bill.P11D price: £23,130CO2 emissions: 117g/km 2022/23 BIK rate: 28%Taxable value (2022/23): £6476Basic-rate taxpayer (20%): £1295 annual BIK chargeHigher-rate taxpayer (40%): £2591 annual BIK charge

*Volkswagen Golf GTI 2.0 TSI 245 (new)*

You would struggle to put this hot hatch on your driveway for around £2500 per year.P11D price: £35,545CO2 emissions: 168g/km 2022/23 BIK rate: 37%Taxable value (2022/23): £13,152Basic-rate taxpayer (20%): £2630 annual BIK chargeHigher-rate taxpayer (40%): £5261 annual BIK charge

*BMW 120d M Sport (new)*

This sporty BMW shows that choosing diesel over something like the more expensive Golf GTI still offers tax advantages.P11D price: £34,805CO2 emissions: 133g/km2022/23 BIK rate: 31%Taxable value (2022/23): £10,790Basic-rate taxpayer (20%): £2158 annual BIK chargeHigher-rate taxpayer (40%): £4316 annual BIK charge

*Volkswagen ID 3** Pro Performance Business (new)*

Even with the 204hp Performance option, Volkswagen's electric family hatchback shows how running an EV brings your tax bill right down.P11D price: £35,780CO2 emissions: 0g/km  2022/23 BIK rate: 2%Taxable value (2022/23): £716Basic-rate taxpayer (20%): £143 annual BIK chargeHigher-rate taxpayer (40%): £286 annual BIK charge

*Toyota Prius Plug-in Hybrid Business Edition Plus (new) *

A combination of low emissions and a 35-mile electric-only range ensures this PHEV attracts a tax-reducing BIK rate.P11D price: £32,590CO2 emissions: 28g/km2022/23 BIK rate: 12%Taxable value (2022/23): £3989Basic-rate taxpayer (20%): £798 annual BIK chargeHigher-rate taxpayer (40%): £1596 annual BIK charge

*Skoda Octavia iV 1.4 TSI SE Technology *

This PHEV hatchback shows just how low these cars can go, thanks to its electric-only range of 43 miles and low CO2 emissions.P11D price: £32,795CO2 emissions: 21g/km2022/23 BIK rate: 8%Taxable value (2022/23): £2624Basic-rate taxpayer (20%): £524 annual BIK chargeHigher-rate taxpayer (40%): £1050 annual BIK charge