The tax implications of having a Company car for you and the business
Company cars remain a valuable benefit for both businesses and employees. They can reduce costs, improve convenience, and even support greener choices. With more electric models available, company cars are no longer just about luxury. They can also be a smart financial decision.
Tax benefits for the business
Capital allowances
Businesses can claim capital allowances on the purchase price of a company car. This reduces taxable profits. For electric cars, the allowance is usually higher, which means quicker and greater savings.
Running costs
Ongoing costs such as insurance, servicing, and repairs are deductible business expenses. This makes the overall cost of offering a company car more manageable.
Electric vehicle (EV) incentives
The UK government currently offers favourable tax treatment for EVs. Businesses can benefit from reduced Class 1A National Insurance on low emission cars compared with petrol or diesel models.
Tax benefits for the individual
For employees, a company car is treated as a benefit in kind (BIK). A BIK is a perk or benefit that an employee receives from their employer, on top of their salary.
It is not paid in cash, but it has a value that HMRC treats as taxable income. For company cars, the BIK value is worked out using the car’s list price and CO₂ emissions. This figure is then used to calculate how much extra income tax the employee must pay.
High emission cars
In the 2025/26 tax year, the BIK rate for most petrol or diesel cars ranges from 15% up to 37% of the car’s list price. A fast petrol/diesel engine car with high emissions will sit at the top end of this range, which means a large taxable benefit.
Electric cars
The BIK rate for fully electric cars is currently 3% until April 2026 and will rise by 1% each year, reaching 5% by 2028. This is still far lower than for petrol or diesel vehicles. For most employees, this means big savings.
Example of a hot hatchback
Take the Audi S3 with a list price of around £50,000 and CO₂ emissions of about 175g/km. This places it at the top 37% BIK rate.
Taxable value = £50,000 × 37% = £18,500
An employee paying 40% income tax would owe about £7,400 per year in BIK tax.
Example of an electric car
Now consider a Tesla Model 3 Long Range with a list price of about £50,000 and zero emissions. The BIK rate is only 3% for 2026.
Taxable value = £50,000 × 3% = £1,500
An employee paying 40% income tax would owe about £600 per year in BIK tax.
This is a huge saving compared with the Audi, even when they have a similar market value!
Recommendations
For businesses: Electric cars provide strong tax relief and support sustainability goals. They are often cheaper to run and help position the company as forward-thinking.
For employees: If you want a practical and affordable company car, an electric model such as a Tesla makes sense. Your tax bill will be far lower, and running costs will be minimal.
Final thoughts
Company cars are no longer just a luxury perk. With electric vehicles, they can save money for both the business and the employee. The right choice depends on priorities. However, if savings and sustainability matter, an electric car is the smarter option.
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