Limited Company Tax for Directors / Lesson 7 of 9
Company cars and benefits
Putting the car through the company usually costs more, unless it is electric.
The short answer
- ✓ Company car tax is based on list price and CO2, not on how much you drive
- ✓ Electric vehicles attract a far lower benefit percentage
- ✓ Claiming mileage in your own car is often better for ordinary cars
- ✓ Employer pension contributions avoid income tax and both classes of NI
Why company cars usually disappoint
The company gets a deduction for the cost, but you are taxed on a benefit in kind based on the car's list price and CO2 emissions, and the company pays employer National Insurance on that same benefit. For most petrol and diesel cars the combined cost exceeds the saving.
List price £32,000
CO2 percentage 28%
Taxable benefit £8,960
You pay at 40% £3,584
Company pays employer NI at 15% £1,344
---------
Annual cost £4,928
Every year the car is available to you.Electric vehicles are the exception
EVs attract a very low benefit percentage, which changes the arithmetic completely. The same £32,000 list price at a low single-digit percentage produces a benefit of a few hundred pounds rather than nearly nine thousand, and the company can often claim enhanced capital allowances on the purchase as well.
This is why almost every company car scheme now pushes electric, and it is a genuine difference rather than marketing.
The alternative: your own car
Keep the car personally and claim mileage from the company at the approved rates: 55p for the first 10,000 business miles and 25p thereafter. The company deducts the payment, and you receive it tax free with no benefit in kind at all.
For a director doing moderate business mileage in an ordinary petrol car, this is usually better than a company car by a clear margin.
Other benefits
| Benefit | Treatment |
|---|---|
| Mobile phone, one per employee | Exempt if the contract is in the company name |
| Private medical insurance | Taxable benefit |
| Annual staff event within the per-head limit | Exempt |
| Trivial benefits within the rules | Exempt |
| Employer pension contributions | Not a taxable benefit, and deductible |
The bit nobody explains
Employer pension contributions are the most efficient extraction route available to most directors. The company deducts them against corporation tax, there is no employer or employee National Insurance, and no income tax arises when they are paid in.
The trade-off is real and obvious: the money is locked away until pension age. But directors weighing salary against dividends often never consider this third route at all.
General tax information, not financial advice.
Common mistakes
- Buying a petrol car through the company. Usually more expensive overall.
- Assuming low mileage reduces the charge. It is list price and CO2 based.
- Putting a phone contract in your own name. The exemption needs the company name.
- Overlooking employer pension contributions. Often the most efficient route.
Try it on your own numbers
This is the same calculator as the full tool page, using 2026/27 rates.
Your company car
List price incl. VAT and most options, less any one-off capital contribution.
HMRC sets a fixed figure each year (check the current car fuel benefit charge on gov.uk). The fuel benefit = this figure × your BIK %.
Your employer pays Class 1A NI on the total benefit. Confirm the current rate on gov.uk.
Annual company car tax
per month from your pay
- Taxable benefit (BIK)
- Fuel benefit
- Total benefit in kind
- Tax on car
- Tax on fuel
- Your tax - per month
Cost to your employer
Class 1A NI per year on the total benefit (in addition to your own tax).
Estimate only. The BIK % depends on the car's CO₂ emissions - electric cars are very low. Check your band on gov.uk.
Annual tax across CO₂ bands
How your annual tax changes as the BIK percentage rises - a low-emission or electric car can sit at the far left, a high-emission car at the right.
Based on a P11D of at . Your current band is highlighted in the table below.
| BIK % | Taxable benefit | Annual tax | Per month |
|---|---|---|---|
What this means for you
Do this next, in order
Estimates only - not financial or tax advice. Confirm figures on GOV.UK or with an adviser.
Compare saved cars
| Car | P11D | BIK | Annual tax | Per month | |
|---|---|---|---|---|---|
Key takeaways
- ✓ Company car tax is based on list price and CO2, not on how much you drive
- ✓ Electric vehicles attract a far lower benefit percentage
- ✓ Claiming mileage in your own car is often better for ordinary cars
- ✓ Employer pension contributions avoid income tax and both classes of NI
Check you have got it
3 quick questions. No score is kept, and you can change your mind.
1. Why is a petrol company car often a poor deal for a director?
2. What makes electric vehicles different?
3. Which extraction route avoids income tax and both classes of National Insurance?
Sources
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