The company car that cost more than the pay rise it replaced

It usually starts as kindness. Someone has done a good year, a pay rise is due, and a car feels like a bigger gesture than a few hundred pounds a month. The business can put it through the books, the employee gets something they can see on the drive, and everybody feels the deal is worth more than it costs.

Then the P11D lands, the employee's tax code changes, and they are worse off in take-home pay than they would have been with the money. The gesture has cost the company more than the pay rise and left the recipient feeling short-changed, which is a remarkable outcome for a decision made out of generosity.

The whole thing turns on one number: the appropriate percentage applied to the car's list price. Get a car whose percentage is 4% and this is one of the best-value benefits in the tax system. Get one at 32% and it is one of the worst.

How the tax is actually calculated

A company car available for private use is a benefit in kind. The taxable amount is the car's P11D value — list price including options and delivery, not what you paid — multiplied by an appropriate percentage set by its CO2 emissions. The employee pays income tax on that figure at their marginal rate. The employer pays Class 1A National Insurance on it, at 15%.

For 2026/27 a pure electric car sits at 4%, up from 3% the previous year, and the published path is a one-point rise a year, reaching a 9% cap by 2029/30. Most petrol and diesel cars sit between 26% and 37%, with 37% the ceiling, and diesels that do not meet the RDE2 standard carry a four-percentage-point surcharge within that cap.

Private fuel is charged separately and it is where the real damage is done. Rather than taxing what the fuel cost, HMRC applies a fixed multiplier — £29,200 for 2026/27 — to the same CO2 percentage. For vans the fuel benefit is a flat £798.

The comparison that should be made and almost never is

Illustrative figures. An employee on a 40% marginal rate is due a £4,000 pay rise, and is offered a car instead.

The pay rise: it costs the employer £4,000 plus 15% employer National Insurance — £4,600 in total. The employee keeps £4,000 less 40% tax and 2% National Insurance, which is £2,320 a year, or £193 a month.

The petrol car: a P11D value of £34,000 at a 32% appropriate percentage gives a taxable benefit of £10,880. The employee pays 40% of that in tax — £4,352 a year, or £363 a month — and the employer pays Class 1A at 15%, which is £1,632, on top of the lease or finance cost. Add employer-paid private fuel and it gets materially worse: £29,200 × 32% = £9,344 of extra benefit, costing the employee another £3,738 in tax and the employer another £1,402 in National Insurance.

So on those numbers the employee is paying £363 a month in tax for a car they could have leased personally for not much more, having given up £193 a month of net pay to get it. That is the conversation nobody has before the order is placed.

A company car is not a perk or a cost. It is a tax calculation, and the same generous gesture is either excellent value or a quiet pay cut depending entirely on the emissions figure.

Now run the same numbers on an electric car

Same employee, same 40% rate, and an electric car with a P11D value of £42,000. At 4%, the taxable benefit is £1,680. The employee's tax is £672 a year — £56 a month — for a £42,000 car. The employer's Class 1A bill is £252.

That is the entire argument for electric company cars, and it does not need any enthusiasm about the technology to make it. A £42,000 EV costs the employee less than a fifth in tax of what a £34,000 petrol car costs them.

Two further points on the company side. New zero-emission cars qualify for a 100% first-year allowance, which the Autumn Budget 2025 extended to 31 March 2027 for corporation tax and 5 April 2027 for income tax — though it is not available to leasing companies, so it applies where the business buys the car outright rather than leasing it. And note that the main rate writing-down allowance fell to 14% from 1 April 2026 for corporation tax, which makes the timing of large capital purchases worth a conversation with your accountant.

Salary sacrifice is the structure most small employers should look at for EVs. Because cars emitting 75g/km or less are outside the optional remuneration rules, the employee gives up gross salary and is taxed only on the low benefit-in-kind figure — which is why an electric car through sacrifice can cost an employee less in net pay than financing the same car personally.

The alternative nobody costs: their own car and mileage

For an employee doing genuine business mileage in a car they own, approved mileage allowance payments are frequently the cheapest option for everyone. The business can pay 45p per mile for the first 10,000 business miles in the tax year and 25p thereafter, tax-free and free of National Insurance, with no benefit in kind and no P11D entry.

Illustrative: 6,000 business miles at 45p is £2,700 paid to the employee with no tax on either side, and a deductible cost for the business. Compare that with the £10,880 benefit in kind on the petrol car and the choice for a modest-mileage employee is not close. Where an employee is paid less than the approved rate, they can claim mileage allowance relief on the shortfall.

Vans are their own regime, taxed on a flat benefit charge rather than a percentage of list price — and a van with only insignificant private use, such as a stop at the shop on the way home, generally produces no taxable benefit at all. Which is why for a trades business, the van question is usually about financing the vehicle sensibly rather than about benefit in kind.

The decision rule

Before offering any car, do four sums on one page: the taxable benefit at the actual appropriate percentage, the employee's tax on it at their marginal rate, the employer's Class 1A at 15%, and the same figures for a straight pay rise of equivalent cost to the business.

Then apply three rules. Never provide private fuel unless the private mileage is enormous — the £29,200 multiplier makes it one of the poorest-value benefits in the tax code, and a fuel card for private use frequently costs more in tax than the fuel is worth. If the car is petrol or diesel and business mileage is modest, pay approved mileage rates on the employee's own car instead. And if a car is genuinely wanted, make it electric and consider salary sacrifice, because at 4% the arithmetic works for both sides in a way it simply does not at 32%.

Above all, show the employee the numbers before the order goes in. Directors should run the same exercise on themselves alongside the rest of their remuneration, since a car interacts with everything else in the mix — how directors actually pay themselves is the calculation a company car sits inside, not beside.

Common questions

How is company car tax calculated in 2026/27?

The taxable benefit is the car's P11D value — the list price including options and delivery, not the price your business paid — multiplied by an appropriate percentage set by its CO2 emissions. The employee pays income tax on that amount at their marginal rate, and the employer pays Class 1A National Insurance on it at 15%. For 2026/27, pure electric cars are charged at 4%, rising by one percentage point a year to a 9% cap in 2029/30. Most petrol and diesel cars fall between 26% and 37%, with 37% the maximum, and non-RDE2 diesels carry a four-point surcharge within that cap.

Is an electric company car really that much cheaper?

Yes, and the gap is large enough to change the decision. On illustrative figures, a £42,000 electric car at the 4% rate for 2026/27 produces a taxable benefit of £1,680, costing a 40% taxpayer £672 a year — about £56 a month — with an employer Class 1A bill of £252. A £34,000 petrol car at a 32% appropriate percentage produces a £10,880 benefit, costing the same employee £4,352 a year and the employer £1,632. New zero-emission cars also qualify for a 100% first-year allowance, extended by the Autumn Budget 2025 to 31 March 2027 for corporation tax, though not for leasing companies.

Should I pay for an employee's private fuel?

Almost never. Private fuel is not taxed on what it costs — HMRC applies a fixed multiplier of £29,200 for 2026/27 to the car's CO2 percentage. On a car at 32%, that produces an extra £9,344 of taxable benefit, costing a 40% taxpayer £3,738 a year in tax and the employer a further £1,402 in Class 1A National Insurance. Unless private mileage is genuinely very high, the tax on the benefit exceeds the value of the fuel provided. The usual alternative is for the employee to pay for private fuel and reclaim business mileage at HMRC's advisory rates instead.

Is it cheaper to pay mileage on an employee's own car?

For modest business mileage it usually is, for both sides. Approved mileage allowance payments let the business pay 45p per mile for the first 10,000 business miles in a tax year and 25p per mile after that, entirely free of tax and National Insurance, with no benefit in kind and no P11D entry. On 6,000 business miles that is £2,700 in the employee's pocket untaxed, and a deductible cost for the business — against a £10,880 taxable benefit on a comparable petrol company car. Where an employer pays less than the approved rate, the employee can claim mileage allowance relief on the difference.