How company car tax works

The three numbers

The P11D value is the list price of the car including delivery, VAT and factory fitted options. It is not what your employer paid, and a fleet discount does not reduce it. Accessories added after registration are added to it, and a capital contribution you make towards the car is deducted from it up to a limit of five thousand pounds.

The appropriate percentage is HMRC's figure for that car in that tax year, taken from a published table. For most cars it comes from the CO2 figure. For cars emitting 1 to 50 g/km it comes from the electric only range instead, and for a zero emission car it is a single low figure.

Your marginal income tax rate is the last multiplier. A basic rate taxpayer pays twenty per cent of the benefit, a higher rate taxpayer forty. Scotland sets its own rates and bands, so a Scottish higher rate taxpayer pays forty two per cent and reaches that rate at a lower salary.

• Taxable benefit equals P11D value multiplied by the appropriate percentage.
• Income tax equals the taxable benefit multiplied by your marginal rate.
• The employer also pays Class 1A national insurance on the same benefit.

Why the electric range matters more than the CO2

Every car emitting between 1 and 50 g/km is banded by how far it goes on the battery alone, not by its CO2 figure. Those bands run from 130 miles and above at the bottom to under 30 miles at the top.

The spread between the top and bottom of that range is very large. Two plug in hybrids with the same list price and the same CO2 figure can be four times apart on tax purely on the range certified on the certificate of conformity.

It is the single most consequential number on a plug in hybrid order form and the one least often quoted in a lease comparison. Ask for it in writing before signing, because it does not appear on the invoice and it decides four years of tax.

The diesel supplement

A diesel car that is not certified to the RDE2 standard pays four percentage points more than its band. HMRC treats RDE2 and Euro 6d as the same thing for this purpose, and the certificate of conformity confirms which a car holds.

The supplement can never push the appropriate percentage above the year's overall cap, which is thirty seven per cent for the tax years in force now. A car already at the cap pays the cap whether or not the supplement applies to it.

It applies to diesel cars only. A diesel hybrid, a plug in hybrid, a petrol, an LPG car and an electric car are never charged it, whichever engine sits under the bonnet.

The fuel benefit, which is usually a bad deal

Where an employer pays for private fuel there is a separate charge, and it is not related to how much fuel you actually use. A fixed multiplier is published each year and multiplied by the same appropriate percentage as the car.

That structure means the charge is identical whether you did two thousand private miles or twenty thousand. For most drivers the tax on the benefit costs more than buying the private fuel themselves, and the sum is worth doing rather than assuming free fuel is a perk.

There is no fuel benefit charge on an electric company car, because electricity is not a fuel for this purpose. An employer paying to charge a company electric car does not create a taxable fuel benefit.

• The fuel benefit is a fixed multiplier times the appropriate percentage, not a measure of fuel used.
• It is all or nothing: contribute nothing towards private fuel and you pay the full charge.
• Electricity is outside it, so charging a company electric car creates no fuel benefit.

Four deductions most calculators ignore

The statutory steps allow four reductions, and every one of them only ever lowers the charge. A calculator that omits them gives you the ceiling rather than the figure.

A capital contribution towards the price of the car comes off the P11D value, capped at five thousand pounds. Months where the car was genuinely unavailable are deducted pro rata. Payments you make to your employer for private use reduce the benefit pound for pound. A car shared with somebody else is apportioned rather than charged twice in full.

The private use payment is the one worth modelling before you accept a car. A monthly contribution reduces the taxable benefit directly, which for a higher rate taxpayer means a pound of contribution saves forty pence of tax on top of whatever the employer does with it.

What is coming, and why it matters now

The rates are published years ahead, which is unusual and useful, because a company car is chosen for three or four years rather than for the year you are in.

Zero emission cars rise by one percentage point a year through 2027/28, then by two points a year in the two years after that. Even at the end of that schedule an electric company car is charged at a fraction of a petrol equivalent.

Cars emitting 1 to 50 g/km lose the electric range split entirely from 2028/29 and move to a single flat percentage. For a long range plug in hybrid that is a very large jump in one step, and anybody ordering one on a four year lease now will meet it before the lease ends.