Company car tax in 2026/27: how the benefit in kind is worked out, why the fuel benefit is usually a bad deal, and the April 2026 mileage rate change.
A sales director I know worked out that his company car was costing him more each month in tax than his first flat cost him in rent. He was only half joking.
Company car tax is one of the few things that can take hundreds of pounds a month off your pay without ever appearing as a line on your payslip. There is no deduction called “car”. Instead your tax code quietly shrinks, and you pay more income tax every month for the rest of the year. That makes it very easy to miss, and very easy to get wrong. If you drive for work, this is the part of your pay most worth ten minutes of attention.
HMRC treats a car you are allowed to use privately as a form of income, puts a value on that income using the car’s list price and its emissions, and taxes you on that value at your normal rate.
That value is called the cash equivalent, or more commonly the benefit in kind. Two numbers drive it. The first is the P11D value, which is the manufacturer’s list price including VAT, delivery, and any optional extras, before any discount your employer negotiated. The second is the appropriate percentage, which HMRC sets according to the car’s CO2 emissions.
Note that neither number is what your employer paid. A car bought at a heavy fleet discount is still taxed on full list price.
The sum is short:
P11D value × appropriate percentage × your income tax rate = your annual tax.
Worked example one, an electric car. You are a higher-rate taxpayer on 40%, and you run a fully electric company car with a P11D value of £42,000. The appropriate percentage for zero emission cars in the 2026/27 tax year is 4%.
Worked example two, the same car as a petrol model. Say the appropriate percentage on your car is 30%. Same £42,000 list price.
Same car park, same driveway, roughly £370 a month difference. That gap is the entire point of the policy, and it is why so many fleets went electric.
Your employer also pays Class 1A National Insurance on the benefit at 15% for 2026/27. On the electric example that is £252 a year to them, and on the petrol example £1,890. Worth knowing when you are negotiating, because the car costs them differently too.
This is the part people find genuinely confusing. HMRC does not send you a bill. It reduces your personal allowance by the value of the benefit, so your tax code drops and payroll takes more tax each period.
On the electric example, your £12,570 allowance falls to £10,890, and your code becomes roughly 1089L instead of 1257L. On the petrol example, a £12,600 benefit is larger than the whole £12,570 allowance, so you end up with a K code, which adds notional income rather than removing allowance. If you have never seen one before, that is what the K tax codes explainer is for.
So if you got a company car and your take-home dropped and nothing on the payslip said why, look at the tax code. That is where it went.
If your employer pays for private fuel as well as the car, there is a second, separate charge, and it is brutal because it is a flat figure. It takes no account of how much fuel you actually burn.
For 2026/27 the car fuel benefit multiplier is £29,200. The sum is the multiplier times the same appropriate percentage.
Take the petrol car above at 30%.
Now check whether it is worth it. HMRC’s advisory fuel rate from 1 June 2026 for a petrol car of 1401cc to 2000cc is 17 pence a mile. At that rate, £3,504 of tax buys you the equivalent of roughly 20,600 private miles of fuel. Unless you personally drive more than that in a year, on top of your business mileage, you are paying more in tax than the fuel is worth to you.
Most people are well under. If your employer offers free private fuel, the honest answer is usually to decline it and pay for your own. Electricity, incidentally, is not treated as a fuel for car fuel benefit purposes, so this charge does not apply to electric company cars at all.
If you use your own car for business rather than a company car, none of the above applies. What matters instead is HMRC’s approved mileage allowance payment, and it changed for the first time in about fifteen years.
From 6 April 2026 the approved rate for cars and vans is 55 pence per mile for the first 10,000 business miles, then 25 pence per mile after that. It was 45 pence for the first 10,000 miles before then. HMRC announced the increase partway through the year and applied it retrospectively to the start of the tax year.
Worked example. You drive 14,000 business miles in your own car this tax year.
Under the old 45p rate that same driving was worth £5,500. The change is worth £1,000 of tax-free reimbursement to you.
Here is the catch that will bite a lot of people this year. Plenty of employers still pay a flat 45p because that is what the policy has said since 2011. If yours pays 45p on 14,000 miles, you receive £6,300 against an approved amount of £6,500. You can claim Mileage Allowance Relief on the £200 shortfall, which is worth £40 at basic rate or £80 at higher rate. Small, but it is your money, and if your employer never updates the policy the gap compounds every year.
Check your last expenses claim. If it says 45p, ask.
A company car usually wins if it is electric. At a 4% appropriate percentage, and especially through a salary sacrifice scheme where you also save National Insurance, the numbers are hard to beat. The salary sacrifice explainer covers how that stacks.
A car allowance often wins if the car is petrol or diesel. A cash allowance is taxed as ordinary pay, so you pay tax and National Insurance on it, but you then own the car, claim your business miles at 55p, and are not exposed to a benefit charge tied to a list price you never paid.
Free private fuel almost never wins. See above.
Watch the higher-rate threshold. A benefit in kind is income. A £12,600 car benefit on a £45,000 salary pushes taxable income past £50,270 and drags part of your earnings into the 40% band. If you are near the line, the car can cost you more than the car.
The zero emission appropriate percentage rose to 4%, from 3% the year before, and is legislated to reach 5% in 2027/28. The 37% ceiling for the highest emitting cars stayed put.
The car fuel benefit multiplier rose to £29,200 in line with inflation. The van benefit charge and van fuel benefit charge went up too.
The genuine news was mileage. After nearly fifteen years frozen at 45 pence, the approved rate for the first 10,000 business miles moved to 55 pence with effect from 6 April 2026.
What did not change: the personal allowance is still £12,570, the higher-rate threshold is still £50,270, and employee National Insurance is still 8% between the two.
If you want to see what a company car actually does to your monthly take-home at your salary and tax code, the NetPay app works it out, including income tax, National Insurance, student loan, and salary sacrifice. Free to download.
Sources: Rates and thresholds for employers 2026 to 2027 (HMRC), Taxation of company cars: the appropriate percentage (HMRC), Van benefit charge and fuel benefit charges for 2026 to 2027 (HMRC).
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HMRC treats private use of a company car as income. It values that income by taking the car's P11D list price and multiplying it by an appropriate percentage based on the car's CO2 emissions. You then pay income tax on that figure at your normal rate, collected by reducing your tax code rather than as a separate deduction on your payslip.
The appropriate percentage for zero emission cars is 4% for the 2026/27 tax year, rising to 5% in 2027/28. On a £42,000 electric car that means a taxable benefit of £1,680, so a higher-rate taxpayer pays about £672 a year, or £56 a month.
Usually not. The car fuel benefit charge for 2026/27 is worked out as £29,200 multiplied by your car's appropriate percentage, regardless of how much fuel you actually use. Unless you do a very large private mileage, the tax often costs more than the fuel is worth.
From 6 April 2026 the approved mileage allowance payment for cars and vans is 55 pence per mile for the first 10,000 business miles in a tax year, then 25 pence per mile after that. This was the first increase since 2011, up from 45 pence, and HMRC confirmed it in June 2026 with retrospective effect.
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A note on financial advice: NetPay UK calculates take-home pay based on official HMRC tax rules. This article reflects rules in force at the time of publication (10 August 2026). Tax rules change. For complex situations, consult a qualified UK accountant or visit gov.uk/income-tax.
