If your employer offers a company car, the amount of tax you pay on it depends almost entirely on one thing: the car's CO2 emissions. Choose a zero-emission electric vehicle and you could pay less than £15 a month. Choose a high-emission diesel and it could cost you over £300 a month in Benefit in Kind (BIK) tax alone.
BIK tax is one of the most misunderstood parts of UK motoring. Many employees either overpay because they picked the wrong car, or miss out on significant savings because they didn't realise how cheap an EV company car could be. This guide explains exactly how BIK works, what the 2026/27 rates are, and how to calculate your monthly cost.
1. What Is Benefit in Kind (BIK) Tax?
Benefit in Kind is the tax you pay on perks your employer provides that aren't part of your salary. A company car is one of the most common BIK items. If your employer gives you a car that's available for private use (including commuting), HMRC treats it as a taxable benefit.
The amount you pay depends on three factors:
- The car's P11D value — its list price including options and VAT, minus the first registration fee and vehicle excise duty
- The BIK percentage rate — set by HMRC based on the car's CO2 emissions
- Your income tax bracket — 20% (basic rate) or 40% (higher rate)
Your employer also pays Class 1A National Insurance (15.05%) on the BIK value, which is why many companies now steer their fleets towards low-emission vehicles.
2. How BIK Tax Is Calculated
The formula is straightforward:
Annual BIK tax = P11D value × BIK rate × your tax rate
For example, if a car has a P11D value of £35,000, a BIK rate of 28%, and you're a 20% taxpayer:
£35,000 × 28% = £9,800 (taxable benefit)
£9,800 × 20% = £1,960 per year (or £163/month)
If you were a 40% taxpayer, the same car would cost you £3,920 per year (£327/month). That's a significant chunk of money — and it's why choosing the right car matters enormously.
3. 2026/27 BIK Rates by CO2 Band
HMRC publishes BIK percentage rates based on CO2 emissions (g/km). Here are the key bands for 2026/27:
| CO2 Emissions (g/km) | BIK Rate 2026/27 | Typical Vehicle Type |
|---|---|---|
| 0 | 2% | Full electric (BEV) |
| 1–50 | 2–14% | Plug-in hybrid (depends on electric range) |
| 51–54 | 15% | Efficient hybrid |
| 55–59 | 16% | Hybrid |
| 60–69 | 17% | Hybrid |
| 70–74 | 18% | Hybrid / efficient petrol |
| 75–79 | 19% | Efficient petrol |
| 80–84 | 20% | Petrol |
| 85–89 | 21% | Petrol |
| 90–94 | 22% | Petrol |
| 100–104 | 24% | Petrol |
| 110–114 | 26% | Petrol / diesel |
| 130–134 | 30% | Diesel |
| 150–154 | 34% | High-emission diesel |
| 170+ | 37% | Performance / large SUV |
The maximum BIK rate is 37%. Diesel cars that don't meet Euro 6d emission standards have a 4% surcharge added (also capped at 37%).
4. Why Electric Cars Are the Best Company Car Choice
At just 2% BIK, electric vehicles are by far the cheapest company cars in tax terms. The difference is dramatic:
| Car | P11D Value | BIK Rate | Annual Tax (20%) | Annual Tax (40%) |
|---|---|---|---|---|
| Tesla Model 3 (EV) | £42,000 | 2% | £168 | £336 |
| BMW 3 Series (petrol) | £42,000 | 30% | £2,520 | £5,040 |
| Audi A4 (diesel) | £40,000 | 33% | £2,640 | £5,280 |
A 20% taxpayer with a Tesla Model 3 pays just £14/month in BIK. The same person with a petrol BMW 3 Series pays £210/month. That's a saving of nearly £2,400 per year just by choosing electric.
5. Worked Examples at 20% and 40% Tax
Here are some popular company cars and what they actually cost in BIK tax each month:
| Car | P11D | CO2 | BIK % | Monthly (20%) | Monthly (40%) |
|---|---|---|---|---|---|
| Tesla Model 3 | £42,000 | 0 | 2% | £14 | £28 |
| Hyundai Ioniq 5 | £45,000 | 0 | 2% | £15 | £30 |
| BMW 330e PHEV | £45,000 | 30 | 8% | £60 | £120 |
| VW Golf 1.5 TSI | £30,000 | 126 | 29% | £145 | £290 |
| BMW 520d | £48,000 | 127 | 33% | £264 | £528 |
| Range Rover Sport | £80,000 | 198 | 37% | £493 | £987 |
The numbers speak for themselves. A higher-rate taxpayer driving a Range Rover Sport pays nearly £1,000/month in BIK tax alone — while a Tesla or Ioniq 5 costs less than £30/month.
6. Salary Sacrifice Schemes and BIK
Many employers now offer salary sacrifice car schemes, where you give up a portion of your gross salary in exchange for a company car. Because the sacrifice comes from your pre-tax salary, you save on both income tax and National Insurance contributions.
Combined with the 2% EV BIK rate, a salary sacrifice scheme can save you 30–60% compared to buying or leasing the same car privately. The savings are largest for 40% taxpayers.
Popular salary sacrifice providers include Octopus EV, Tusker, and LeasePlan. Your employer needs to have a scheme set up — it's worth asking your HR or fleet department if one is available.
Looking for a low-BIK company car?
Browse electric and hybrid cars on SortedCars.
7. What Is P11D and How to Read It
The P11D is a form your employer submits to HMRC each year detailing the benefits and expenses they've provided to you. For company cars, the key figure is the P11D value — the car's list price including factory-fitted options and delivery charges, plus VAT, minus the first registration fee (£55) and vehicle excise duty (road tax).
Important things to know about P11D value:
- It's based on the car's list price, not what your employer actually paid. Fleet discounts don't reduce it
- Any factory-fitted options (bigger wheels, tech packs, paint upgrades) increase the P11D value
- Accessories fitted after registration are only included if they cost over £100
- Employee capital contributions (you paying towards the car) can reduce the P11D value by up to £5,000
8. Check Your P11D Is Correct
Errors on P11D forms are surprisingly common. If your employer reports the wrong P11D value, the wrong CO2 figure, or fails to account for your capital contribution, you could be paying too much tax. Here's how to check:
- Ask your employer for a copy of your P11D — they must provide one by 6 July each year
- Check the P11D value against the manufacturer's original list price plus the options your car has
- Check the CO2 figure — use the V5C logbook or the DVLA vehicle enquiry service to confirm
- Check your tax code on your payslip or personal tax account at gov.uk/personal-tax-account
- Use HMRC's company car tax calculator at gov.uk/tax-company-benefits to verify what you should be paying
If anything is wrong, contact your employer's payroll team first. If they won't correct it, you can contact HMRC directly.
- Choosing a car based on list price alone — A £45,000 EV costs far less in BIK than a £30,000 petrol car
- Adding expensive options without considering BIK impact — Every option increases the P11D value and your tax
- Not claiming capital contributions — If you paid towards the car, up to £5,000 can reduce the P11D value
- Forgetting the diesel surcharge — Non-Euro 6d diesels get an extra 4% added to their BIK rate
- Not checking your tax code — HMRC sometimes gets it wrong, and you pay the price until it's corrected
Final Thoughts
BIK tax is one of the biggest hidden costs of a company car — but it's also one of the biggest potential savings. If your employer offers a company car scheme, choosing a zero-emission electric vehicle at 2% BIK could save you thousands of pounds a year compared to a traditional petrol or diesel option.
Always calculate the full cost before choosing a company car. Use HMRC's company car tax calculator, check the P11D value including all options, and compare the monthly BIK cost at your tax rate. In most cases, an electric company car through a salary sacrifice scheme is the cheapest way to drive a new car in the UK.
Tax rates and BIK bands are subject to change. For specific tax advice about your situation, consult a qualified accountant or tax adviser.
Related reading: Salary Sacrifice Car Schemes | Company Car vs Car Allowance | Why an Electric Company Car Saves Thousands
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