What is company car tax and how does it affect PAYE and NICs in 2026/27?

For UK employers running a fleet of company cars, the 2026/27 tax year sharpens the cost picture: the BiK rate for electric cars climbs to 4%, Employer Class 1A NICs stay at 15%, and HMRC's tightened P11D / P11D(b) rules mean any reporting slip can quickly trigger penalties and mis-issued tax codes. This guide explains how to calculate the tax, how it shows up via the tax code, and the year-end reporting deadlines payroll teams cannot afford to miss.

How company car tax creates a PAYE and NICs obligation in 2026/27?

Company car tax creates a PAYE obligation because the privately used company vehicle is treated as a benefit-in-kind under ITEPA 2003, and HMRC collects the tax via an adjusted PAYE tax code rather than as a direct salary deduction. The employer reports the benefit on a P11D (unless payrolled), and HMRC uses the information to reduce the employee’s tax-free personal allowance so the correct amount of tax is collected through PAYE each month.

Employers must also pay Employer Class 1A NICs at 15% on the taxable value of all company car benefits, reported via P11D and P11D(b), which links the car directly to HMRC’s end-of-year NICs and income tax process. Workers receiving any benefit-in-kind from the employer, including company cars, fall under the same framework described in HMRC's Expenses and benefits A to Z.

💡 Good to know: company car tax is not a salary deduction; it is collected by adjusting the employee’s tax code, which reduces their tax-free personal allowance and increases the tax withheld through PAYE.

How does company car tax appear on a payslip?

Company car tax usually appears on the payslip indirectly, through a changed tax code and higher PAYE deductions, rather than as a separate cash deduction. Some payroll systems may also display a company car or BiK reference for transparency. In practice:

• The employee’s tax-free personal allowance is reduced

• More of their pay falls into the 20% or 40% band

• The extra tax is collected through PAYE, month by month

What are the key employer reporting deadlines for company car tax?

Employers must file P11D for each employee receiving a company car by 6 July after the tax year-end, then submit P11D(b) to calculate Class 1A NICs at 15% on the total BiK. The Class 1A NICs are payable by 22 July when paid electronically, or 19 July if paid by cheque. Missing these dates can trigger HMRC penalties and interest, so payroll teams track them alongside other year-end checks, including payroll reconciliation.

How is company car tax calculated in 2026/27?

Company car tax in 2026/27 is calculated as the P11D value multiplied by the appropriate BiK percentage, then multiplied by the employee’s income tax rate (20% or 40%). According to GOV.UK guidance on tax on company cars, the P11D value is the car's list price including any optional extras, minus qualifying capital contributions up to £5,000 made by the employee, which reduces the taxable benefit.

The broad logic can be summarised in one short table:

This is the core calculation payroll teams need to validate before year-end reporting.

📌 Example: a petrol car with a P11D value of £30,000, CO₂ emissions of 120g/km (30% BiK band) and a 20% income tax rate produces £30,000 × 30% × 20% = £1,800 of annual company car tax. Modern payroll reports can help track the correct P11D and BiK values for each employee and integrate them with broader types of employee benefits reporting across the business.

How do you select the correct CO₂ BiK band for 2026/27?

The correct CO₂ BiK band is taken from the vehicle’s WLTP CO₂ figure on its certificate of conformity, which HMRC uses to assign the appropriate BiK percentage for 2026/27. HMRC runs bands from 51g/km up to 170g/km, capped at 37%, and applies a 4% diesel surcharge to vehicles that do not meet Euro 6d standards. Using the correct WLTP figure helps avoid an incorrect BiK band and mis-reported tax.

What is the fuel benefit charge for private fuel on a company car?

The fuel benefit charge applies only when the employer pays for private fuel used in a company car, even if the employee already pays tax on the car itself. For 2026/27, HMRC uses a fixed multiplier of £29,200 and applies the same CO₂ BiK percentage as the car, then multiplies the result by the employee’s income tax rate. The benefit is reported as a separate line on the P11D and adds a second BiK layer on top of the car-benefit, which payroll teams capture in the same year-end reporting workflow and may link to wider pre‑tax deductions analysis.

What are company car tax rates for electric and hybrid cars in 2026/27?

For 2026/27, the BiK rate for fully electric cars is 4%, rising by 1 percentage point per year under HMRC’s published multi‑year schedule, as confirmed in HMRC’s guidance on tax on company cars. This means electric company cars are not tax-free; they still generate a BiK charge collected via PAYE, just at a lower rate than most petrol and diesel vehicles.

For plug-in hybrids, HMRC sets BiK rates by reference to WLTP CO₂ emissions and certified electric range, with lower‑emission and longer‑range vehicles generally qualifying for lower BiK bands under HMRC rules. The WLTP figure must come from the certificate of conformity, not marketing estimates, to avoid mis-reported tax.

Key points for 2026/27:

• Electric cars: 4% BiK in 2026/27, rising to 5% in 2027/28

• Plug-in hybrids: 7%–16% BiK, by WLTP electric-range on the certificate of conformity

• Salary sacrifice / OpRA: HMRC has special valuation rules that may override the standard P11D BiK calculation

⚠️ From 6 April 2028, BiK rates for plug-in hybrids will reset to align with internal combustion vehicles, removing the current favourable electric-range bands. Employers planning multi-year fleet decisions should factor this in.

Where a company car is provided under salary sacrifice or another Optional Remuneration Arrangement (OpRA), HMRC requires the BiK to be valued at the higher of the salary forgone or the standard BiK calculation. Ultra-low-emission vehicles (≤75g/km CO₂) are exempt from this rule and keep the standard BiK calculation, making electric cars particularly attractive under salary sacrifice.

How do you calculate company car tax on a plug-in hybrid?

Company car tax on a plug-in hybrid uses the standard formula: P11D value × BiK percentage × income tax rate (20% or 40%), with the BiK percentage taken from the WLTP electric-range table in HMRC’s 2026/27 guidance.

• The electric-range band runs from ≥130 miles (7%) to <30 miles (16%)

• The electric-range figure must come from the certificate of conformity, not marketing data

• If the car is provided under salary sacrifice or an OpRA, HMRC’s special valuation rules may change the P11D value or BiK rate used in the calculation

How do employers manage company car tax in payroll?

Employers manage company car tax by turning the BiK into a standard PAYE workflow: HMRC uses company car information reported through its online services or compatible payroll processes to issue or update the employee’s PAYE tax code, so the correct BiK is collected through payroll. The tax is usually reflected through the tax code rather than as a separate cash deduction on the payslip, although some payroll systems may display a benefit reference for transparency.

👉 To note: employers should update HMRC promptly when a company car is provided, changed or withdrawn, as delays can result in incorrect PAYE tax codes and under- or over-collected tax.

At year-end, the same BiK figure feeds into P11D per employee and P11D(b), where Class 1A NICs at 15% are calculated on the total BiK value, closing the loop between monthly PAYE and annual benefits-in-kind reporting.

Key payroll steps:

• Update HMRC when a company car is provided, changed or withdrawn

• Use the revised PAYE tax code for monthly PAYE

• At year-end, file P11D and P11D(b) for all company car benefits

Managing company car tax correctly is part of the move toward the future-of-finance-style digital payroll, where accurate benefit-in-kind handling supports both compliance and cost-conscious planning.

How do employers notify HMRC about a company car?

Employers notify HMRC about a company car through the relevant HMRC online process or compatible payroll reporting, so HMRC can update the employee’s PAYE tax code and collect the correct BiK through payroll.

How do you complete P11D and P11D(b) at year-end?

You complete P11D for each employee who received a company car during the tax year and file P11D(b) to calculate Class 1A NICs at 15% on the total BiK value. P11D must be filed by 6 July, and Class 1A NICs are payable by 22 July when paid electronically, or 19 July by cheque.

⚠️ Warning: missing the 6 July P11D deadline can trigger penalties of £100 per 50 employees per month, and late Class 1A NIC payments (due 22 July electronically / 19 July by cheque) accrue daily interest at HMRC's published rate. Both are tracked separately by HMRC and can stack quickly across larger fleets.

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