Many business owners eventually face the same decision. The current car is nearing the end of its lease, someone has suggested putting a vehicle through the company, and suddenly you're comparing electric cars, hybrids, Benefit in Kind tax and lease costs all at once.

At first glance, a company car can seem expensive from a tax perspective. After all, if a business buys or leases a vehicle for personal use, HMRC generally treats it as a benefit.

However, not all company cars are taxed equally.

The gap between electric vehicles and traditional petrol or diesel cars remains substantial in 2026/27, making electric cars one of the most attractive tax-planning opportunities for many directors and employees.

So how do company car taxes work?

When a company provides a vehicle that is available for private use, the employee receives a Benefit in Kind (BIK).

The tax isn't based on what the company spends running the vehicle. Instead, it's calculated using the following:

The vehicle's list price (P11D value)
Its CO₂ emissions
The employee's income tax rate

This all results in a taxable benefit that is added to the employee's income for tax purposes.

In other words, the cleaner the vehicle, the lower the Benefit in Kind percentage applied to the list price. This is why electric vehicles continue to receive favourable treatment.

What are the company car tax rates in 2026/27

For the 2026/27 tax year, fully electric vehicles attract a Benefit in Kind rate of 4%.

Plug-in hybrids can also qualify for relatively low rates, although this depends on both emissions and electric-only driving range.

Traditional petrol and diesel vehicles are considerably less favourable, with many attracting Benefit in Kind rates of 30% or more.

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Vehicle type	Typical BIK rate
Electric vehicle	4%
Plug-in hybrid emitting 1–50g/km	4% to 16%depending on official electric range
Petrol or diesel	Up to 37%

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While electric vehicle rates have increased gradually, they remain significantly lower than those applied to higher-emission vehicles.

How are rates changing in 2027/28?

The electric-car Benefit in Kind rate is scheduled to increase to 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30. From 2028/29, cars emitting 1g to 50g of CO₂ per kilometre, including qualifying plug-in hybrids, will generally be subject to an 18% rate, rising to 19% in 2029/30.

A worked tax example: electric car vs petrol car

Let's assume you're considering a vehicle with a list price of £50,000. Not uncommon for popular EVs like Tesla or Polestar.

Electric vehicle Benefit in Kind calculation

The standard Benefit in Kind calculation for EVs is: £50,000 × 4% = £2,000 taxable benefit
But for a higher-rate taxpayer: £2,000 × 40% = £800 annual tax cost

Petrol vehicle Benefit in Kind calculation

Assuming a Benefit in Kind rate of 30%: £50,000 × 30% = £15,000 taxable benefit
For a higher-rate taxpayer: £15,000 × 40% = £6,000 annual tax cost

As you can see, the difference here is quite significant. Instead of paying around £800 annually in personal tax, you could pay about £6,000 for a vehicle of similar value. This is why many company car conversations start with vehicle preference but end with tax planning.

How does company car choice affect the company?

So far we’ve looked at the personal tax position for company cars, but that’s only half the story.

Tax relief

The company may also be able to obtain tax relief on vehicle costs, depending on how the vehicle is acquired and used. For leased vehicles, lease costs are generally deductible when calculating taxable profits. However, for most cars emitting more than 50g/km of CO₂, 15% of the otherwise allowable lease cost is disallowed for tax purposes.

VAT

Businesses may also be able to recover some VAT on leasing costs and running expenses where conditions are met.

Capital allowances

If a company buys a new, unused zero-emission car, it can currently qualify for a 100% first-year capital allowance. For companies, this is available for qualifying expenditure incurred on or before 31 March 2027.

After that date, the upfront tax relief available on purchasing an electric car could be significantly reduced under the rules then applying.  The tax relief could be spread across say, 20+ years causing significant delays between the cash outlay and the tax relief.

That makes timing particularly important for businesses considering buying an EV before April 2027. Vehicle lead times should be factored into the decision, but the key tax question is when the expenditure is treated as incurred for capital allowance purposes. Simply placing an order or paying a deposit before 31 March 2027 does not necessarily guarantee that the 100% first-year allowance will be available. 

If you're planning an EV purchase around this date, it is worth checking the tax position before committing to the order. 

What does this mean for the price of company EVs?

This all means the overall cost of running an electric vehicle through a limited company can be quite a bit lower than funding the same vehicle personally from post-tax income. As with most tax considerations, the outcome depends on your circumstances, including profitability, tax rates and intended business use.

Common company car mistakes to avoid

Unfortunately, company car arrangements can go wrong when proper planning doesn’t take place. The most common mistake we see is focusing entirely on monthly payments.

A cheaper monthly lease can become surprisingly expensive once you consider the full tax implications.

Here are some of the biggest banana skins to avoid;

Choosing a vehicle before calculating the Benefit in Kind charge.
Assuming a hybrid will receive the same tax treatment as a fully electric vehicle.
Comparing lease costs without considering the personal tax position.
Looking at the company cost without considering the employee's tax cost.

The right answer is rarely settled by the vehicle alone. It's usually the combination of vehicle choice, business structure and personal tax position that matters more.

So is an electric company car still worth it?

In most cases, yes. An electric company car is often a worthwhile choice.

Electric vehicles are not quite as generous from a tax perspective as they were a few years ago, but they remain one of the most tax-efficient benefits available through a limited company.

However, the way an EV is funded is becoming increasingly important. While Benefit in Kind rates remain relatively favourable, businesses considering buying rather than leasing an electric car should pay particular attention to the capital allowance position from April 2027.

For many directors, the tax saving alone is enough to justify seriously considering an electric vehicle when replacing an existing company car.

The key is to base the decision on the total cost rather than the headline monthly payment.

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Are you considering a new company car? We can help you compare the personal and company tax implications before you commit, helping you identify the most tax-efficient option for your circumstances. We can even tell you our favourite models if you're interested!

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