If you are a director considering putting a car through your limited company, the tax treatment is not straightforward. You need to understand two separate tax systems that interact: capital allowances (which affect your company's corporation tax bill) and benefit-in-kind (BIK) (which affects your personal tax).

This article explains how limited company car tax relief works in 2025/26, with real numbers for both electric and petrol cars. We will cover what your company can claim, what you pay personally, and how to decide which route makes financial sense.

The Two Sides of Company Car Tax

When your limited company buys a car, two things happen:

  • Your company gets a capital allowance deduction against its profits, reducing corporation tax.
  • You receive a benefit-in-kind on your personal tax return, increasing your income tax bill.

You cannot have one without the other. The company claims the tax relief, and you pay tax on the private use of the car. That is the trade-off.

There is no separate "company car tax relief" claim form. The relief comes through the normal corporation tax return (CT600) via capital allowances, and the BIK charge is reported on form P11D and taxed through your self assessment (SA100).

Capital Allowances on Company Cars in 2025/26

The capital allowance your company can claim depends entirely on the car's CO2 emissions. The rules changed significantly from April 2021, and the 2025/26 rates continue the same structure.

Zero-Emission Cars (Electric)

Electric cars with CO2 emissions of 0g/km qualify for 100% First Year Allowance (FYA). Your company can deduct the full purchase price from its profits in the year of purchase.

Example: Your company buys an electric car for £35,000. You can deduct the full £35,000 from taxable profits in year one. At 19% corporation tax (assuming profits under £50,000), that saves £6,650 in tax. At 25% (profits over £250,000), the saving is £8,750.

There is no cap on the FYA for electric cars. Even a £70,000 Tesla Model S qualifies for 100% relief in year one.

Low-Emission Cars (1-50g/km CO2)

These cars (mainly plug-in hybrids) qualify for a reduced FYA of 18% per year on a reducing balance basis. This is the same rate as main pool plant and machinery.

Example: A plug-in hybrid costing £35,000 with 40g/km CO2. Year one: 18% x £35,000 = £6,300 deduction. Year two: 18% x (£35,000 - £6,300) = £5,166 deduction. And so on.

All Other Cars (Over 50g/km CO2)

Most petrol and diesel cars fall into this category. They qualify for 6% per year special rate pool on a reducing balance basis.

Example: A petrol car costing £35,000 with 130g/km CO2. Year one: 6% x £35,000 = £2,100 deduction. Year two: 6% x (£35,000 - £2,100) = £1,974 deduction.

The capital allowance rate does not change based on the car's cost. A £35,000 petrol car gets the same 6% rate as a £15,000 one.

Benefit-in-Kind (BIK) on Company Cars in 2025/26

The BIK charge is what you pay personally for having private use of the company car. HMRC calculates it as a percentage of the car's list price (the P11D value, not what you actually paid).

The percentage depends on CO2 emissions. For 2025/26:

  • 0g/km (electric): 2% of list price
  • 1-50g/km (hybrid): 14-18% depending on electric range
  • 51-75g/km: 19%
  • 76-150g/km: 20-31% depending on exact CO2
  • Over 150g/km: 37% (the maximum)

These percentages are set to increase for electric cars to 3% in 2026/27 and 4% in 2027/28, so the current 2% rate is a temporary incentive.

Real Numbers: Electric vs Petrol for a Basic Rate Director

Let us compare two scenarios for a director earning £50,000 salary plus dividends (basic rate taxpayer). Both cars have a list price of £35,000.

Electric car (0g/km, 2% BIK):

  • Company capital allowance: £35,000 deduction. Corporation tax saving at 19%: £6,650.
  • Director BIK charge: 2% x £35,000 = £700. Tax at 20%: £140 per year.
  • Total net benefit in year one: £6,650 company saving minus £140 personal tax = £6,510.

Petrol car (130g/km, 30% BIK):

  • Company capital allowance: 6% x £35,000 = £2,100 deduction. Corporation tax saving at 19%: £399.
  • Director BIK charge: 30% x £35,000 = £10,500. Tax at 20%: £2,100 per year.
  • Total net benefit in year one: £399 company saving minus £2,100 personal tax = -£1,701 (a net cost).

The electric car saves your company significant tax while costing you very little personally. The petrol car costs you more in personal tax than the company saves.

Fuel Benefit and Free Charging

If your company pays for the fuel for private mileage, that triggers an additional BIK charge. For 2025/26:

  • Petrol/diesel: The fuel benefit is calculated as £28,200 (the car fuel benefit multiplier) multiplied by the same BIK percentage as the car. For the petrol car above: 30% x £28,200 = £8,460. Tax at 20%: £1,692 extra per year.
  • Electric: If your company pays for electricity for private charging (including at your home), there is no separate fuel benefit charge. HMRC treats electricity as a different class of fuel. However, if the company reimburses you for home charging costs, that is a separate matter (see below).

Most directors avoid the fuel benefit charge entirely by reimbursing the company for private fuel. You can do this by keeping a mileage log and paying the Advisory Fuel Rate (AFR) for private miles. The AFR for petrol is typically 14-16p per mile depending on engine size. For electric, it is 7p per mile (the Advisory Electricity Rate).

What About Charging an Electric Car at Home?

If your company provides an electric car and you charge it at home, the company can reimburse you for the electricity used for business mileage at 7p per mile (the Advisory Electricity Rate). This is tax-free and NIC-free.

For private charging at home, there is no benefit-in-kind charge on the electricity itself. However, if the company pays for a home charger installation (typically £800-£1,500), that is a benefit-in-kind unless the charger is installed primarily for business use. HMRC's guidance is that a home charger provided to an employee or director is a taxable benefit, with the BIK based on the cost of the charger.

Alternatively, the company can install a charger at its own business premises and you charge there. That avoids the home charger BIK issue entirely.

Leasing vs Buying: Does It Change the Tax Treatment?

If your company leases a car rather than buying it, the tax treatment changes.

Operating lease: The monthly lease payments are deductible as a business expense. However, for cars with CO2 over 50g/km, 15% of the lease cost is disallowed (the "private use adjustment"). For electric and low-emission cars (under 50g/km), 100% of the lease cost is deductible.

Finance lease: Treated similarly to buying for capital allowance purposes. The capital element of each payment goes into the relevant capital allowance pool (6% or 18% pool depending on emissions).

Leasing can be attractive for high-CO2 cars because you avoid the slow 6% capital allowance pool. But the BIK charge still applies to you personally regardless of whether the company leases or buys.

Class 1A National Insurance on Company Cars

Your company must pay Class 1A National Insurance on the BIK value of the car and any fuel benefit. The rate for 2025/26 is 13.8%.

Using the electric car example above: BIK value £700 x 13.8% = £96.60 employer NI per year.

For the petrol car: BIK value £10,500 x 13.8% = £1,449 employer NI per year. Plus the fuel benefit if applicable.

This employer NI is deductible against the company's profits, but it is still an additional cost to factor in.

When Does a Company Car Make Financial Sense?

Based on the numbers above, a company car makes clear financial sense in these scenarios:

  • Electric cars only. The combination of 100% FYA and 2% BIK is extremely tax-efficient. If you need a new car and can charge at home or work, an electric company car is hard to beat.
  • Very high business mileage. If you drive 20,000+ business miles per year, the company can claim mileage allowances (45p per mile for the first 10,000 miles, 25p thereafter) which may be more tax-efficient than a company car. But the company car route can still work if the car itself is electric.
  • You want a single vehicle for business and personal use. A company car covers both, with the BIK charge being the personal cost. If you would otherwise buy a car personally and claim mileage, compare the two routes carefully.

A company car generally does not make sense for petrol or diesel cars unless you have a specific reason (e.g., you need a specific vehicle for your trade and cannot practically use your own car). The 6% capital allowance is slow, and the BIK charge is high.

Alternatives to a Company Car

If the numbers do not stack up for a company car, consider these alternatives:

  • Use your own car and claim mileage. Your company pays you 45p per mile for the first 10,000 business miles, 25p thereafter. This is tax-free and NIC-free. You own the car personally, so no BIK applies. This is often better for petrol/diesel cars.
  • Buy the car personally and lease it to the company. You charge the company a commercial rate for using your car. This is more complex and requires a formal hire agreement. Not common for most directors.
  • Use a salary sacrifice scheme. Some companies offer salary sacrifice for electric cars, but for a director this is usually less efficient than the company car route because you lose the capital allowance benefit.

For most directors, the choice comes down to electric company car vs personal car with mileage. Run the numbers for your specific situation before deciding.

Practical Steps for Directors

If you decide a company car is right for you:

  1. Choose an electric car. The tax numbers favour electric overwhelmingly.
  2. Check the list price. The BIK is based on the P11D value (list price including VAT, delivery, and optional extras). A £40,000 electric car means a BIK of 2% x £40,000 = £800 per year. That is still very low.
  3. Report the car on form P11D. Your company must submit a P11D for each director with a company car by 6 July after the tax year end. The BIK is then included in your self assessment.
  4. Keep a mileage log. Even with an electric car, HMRC may ask for evidence that the car is used for business. A simple log of business journeys is enough.
  5. Consider the home charger. If you install a charger at home, decide whether the company pays for it (triggering a BIK) or you pay personally (no BIK, but you claim the electricity cost for business miles).

Final Thoughts

The tax treatment of company cars in 2025/26 is heavily skewed toward electric vehicles. If you are a director considering a company car, the financial case for electric is strong, while petrol and diesel cars are generally not worth the personal tax cost.

As ICAEW qualified accountants, we see many directors who assume a company car is always tax-efficient. It is not. The limited company car tax relief only works well when the capital allowance benefit outweighs the personal BIK cost. For electric cars, it does. For everything else, run the numbers carefully.

If your turnover crossed the VAT threshold in the last 30 days, register inside the 30-day window. That is a separate issue, but one that catches many directors who buy a company car and then realise their turnover triggers VAT registration.

For a full review of your specific situation, including how a company car interacts with your dividend strategy, pension contributions, and overall tax position, speak to a qualified accountant who understands director tax planning.