The Payroll Implications of Providing Company Cars (UK)

This is a high-value topic for clients, particularly those considering their fleet strategy. The key information for the 2025/2026 tax year is the planned increase in the Benefit-in-Kind (BiK) rates for Ultra-Low Emission Vehicles (ULEVs) and the steady, high rates for high-emission cars.

Here is the article, complete with a call to action relevant to your payroll services, Zaypay.

Company Car Tax: Your Benefit-in-Kind (BiK) Guide for the 2025/2026 Tax Year

Providing a company car for private use is a highly desirable employee benefit, but it carries a tax implication known as Benefit-in-Kind (BiK). For the 2025/2026 tax year, the rules continue to heavily favour low- and zero-emission vehicles, though even these are now subject to planned, gradual rate increases.

1. How is Company Car BiK Calculated?

The annual tax due on a company car is based on three core factors:

1. The Car’s P11D Value: This is the list price of the car, including VAT, delivery charges, and all optional extras, but excluding the first registration fee and annual road tax.

2. The BiK Percentage: A percentage rate determined by the car’s official $\text{CO}_2$ emissions (in g/km) and its electric-only range (for Plug-in Hybrid Electric Vehicles, or PHEVs).

3. The Employee’s Income Tax Rate: The rate at which the employee pays tax (20% Basic, 40% Higher, or 45% Additional Rate).

The Calculation Formula:

2. Key BiK Percentage Rates for 2025/2026

The 2025/2026 tax year marks the start of the planned gradual increase in BiK rates for the most environmentally friendly vehicles.

A. Fully Electric & Ultra-Low Emission Vehicles (ULEVs)

Employer Insight: Even with the 1% rise, EVs remain the most tax-efficient option. However, rates for PHEVs with a shorter electric range (under 40 miles) are climbing, which may influence employee vehicle choice.

B. Petrol and Diesel Vehicles (51 g/km and above)

For conventional Internal Combustion Engine (ICE) cars, the BiK percentage continues to rise steadily, up to the maximum cap.

The BiK rate for non-RDE2 compliant diesel vehicles is subject to a 4% surcharge, capped at the overall maximum of 37%.

3. Employer National Insurance Contributions (NICs)

It is important to remember that as the employer, you also incur a tax liability on company cars: Class 1A National Insurance Contributions (NICs).

You must pay NICs at the employer rate (13.8% in 2025/2026) on the full taxable benefit value.

The lower the BiK percentage (i.e., the greener the car), the lower the Employer NICs, which represents a direct saving for your business.

4. Mandatory Payrolling of Benefits (Coming Soon)

While employers currently have the option to report BiK via the annual P11D forms, HMRC has announced that the payrolling of benefits in kind will become mandatory from April 2026.

This means that from the 2026/2027 tax year, the tax on company cars will have to be calculated and deducted through the PAYE system every pay period. Preparing your payroll systems for this change is a vital step in maintaining compliance.

Simplify Your Company Car Tax with Zaypay

Calculating and reporting company car tax correctly, especially when dealing with fluctuating tax rates, electric ranges, and upcoming mandatory payrolling changes, is a significant administrative task.

At Zaypay, we specialise in simplifying complex payroll and BiK compliance. We ensure that your employee deductions and employer NIC payments are accurate in every pay run for the 2025/2026 tax year and beyond, keeping your business fully compliant.

Let us manage your benefits-in-kind reporting so you can focus on driving your business forward.