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Company car tax is increasing again in 2026/27, and if you drive a company car or provide one as an employer, the changes will cost you more than last year — on the same vehicle. Understanding what is changing and acting before the increases compound is exactly where our tax advisors at Tax Accountant can make a real difference to your position.
What Is Company Car Tax and How Is It Calculated?
When an employer makes a car available for an employee’s private use, HMRC treats that as a taxable benefit-in-kind. The charge applies simply because the car is available — there does not need to be any actual private use for the tax to kick in.
The taxable amount is calculated by applying the appropriate percentage to the car’s list price, including any optional extras. That percentage is driven almost entirely by the car’s CO2 emissions. The higher the emissions, the higher the appropriate percentage and the bigger the benefit-in-kind charge. The list price can be reduced by capital contributions of up to £5,000, and the taxable amount reduces if the employee is required to make a private use contribution as a condition of the car being provided. Diesel cars that do not meet the RDE2 standard carry a further 4% supplement.
Employers are affected too. Class 1A National Insurance Contributions are payable on the benefit amount — currently at 15%. So when the benefit value rises, both the employee’s income tax bill and the employer’s NICs bill rise with it. HMRC’s official guidance on how company car tax is calculated sets out the mechanics clearly.
What Is Changing in 2026/27?
The appropriate percentage increases by one percentage point in both 2026/27 and 2027/28, subject to a maximum charge of 37%. That sounds modest, but on a car with a list price of £40,000 and CO2 emissions of 60g/km, the taxable amount rises from £7,200 in 2025/26 to £7,600 in 2026/27 and £8,000 in 2027/28. For a higher rate taxpayer, that means paying an extra £160 in tax in 2026/27 and an extra £320 more than 2025/26 by 2027/28 — on a car that is actually depreciating in value the whole time. The employer’s Class 1A NICs bill rises in lockstep.
Our tax advisors can work through the exact figures for your specific vehicle, tax band and salary level so you know what you are facing and whether there are more efficient alternatives worth exploring through our employment tax services.
Electric and Low-Emission Cars: A Much Bigger Problem Coming
Zero-emission electric cars see the same one percentage point rise, moving from 3% in 2025/26 to 4% in 2026/27 and 5% in 2027/28. Still comparatively low — but the picture changes sharply from 2028/29 onwards and this is where many company car drivers are simply not prepared.
Currently, cars with CO2 emissions of 1 to 50g/km are taxed based on their electric range. A car with more than 130 miles of electric range attracts an appropriate percentage of just 3% in 2025/26. From 2028/29, however, electric range becomes entirely irrelevant for this band. Every car in the 1 to 50g/km bracket will face a flat rate of 18%. On a £40,000 car, the taxable amount jumps from £2,000 in 2027/28 to £7,200 in 2028/29 — in a single year. For a higher rate taxpayer, that is an overnight increase of £2,080 in their annual tax bill on a car they may have chosen specifically because of its low benefit-in-kind charge.
If your car or your company’s fleet includes vehicles in this band, our team can help you think carefully about replacement timing and future fleet choices before 2028 forces the issue. This is the kind of forward planning that falls squarely within our tax planning and advisory work.
What About Plug-In Hybrid Vehicles?
New EU and UN emissions standards took effect from 1 January 2025, and CO2 figures for plug-in hybrid vehicles came out considerably higher under the new methodology. Left unaddressed, this would have pushed many PHEV drivers into a higher tax band immediately.
The government introduced a temporary easement for PHEVs registered on or after 1 January 2025 and on or before 5 April 2028. Where the vehicle has CO2 emissions of 51g/km or above and was registered under a standard other than Euro 6d-ISC-FCM or Euro 6e, it is treated as having a notional emissions figure of 1g/km — provided it has at least one mile of electric range. This keeps it within the 1 to 50g/km band for tax purposes. Where the car is made available to an employee before 5 April 2028, the easement continues until the arrangement is varied or renewed, or at the latest until 5 April 2031.
Whether this easement applies to your specific vehicle requires checking carefully. Our tax advisors can confirm the position and ensure you are not paying more benefit-in-kind tax than the rules require.
Free Fuel in a Company Car
If your employer also covers fuel for private journeys, a separate fuel benefit charge applies. The taxable amount is calculated by multiplying the appropriate percentage by the car fuel multiplier, which rises to £29,200 in 2026/27, up from £28,200 in 2025/26. This is worth reviewing if the benefit is provided but not heavily used — in many cases the tax cost of the free fuel outweighs its value.
One exception worth noting: there is no fuel benefit charge where an employer provides electricity for private journeys in a company car. This remains one of the genuine tax advantages for electric vehicle drivers that is still intact for now.
Electric Vehicle Excise Duty from 2028
From 6 April 2028, a new mileage-based charge called electric vehicle excise duty will apply to electric and hybrid vehicles — set at 3 pence per mile for electric cars and 1.5 pence per mile for hybrids. The government is still consulting on the full details, but this is an additional cost that needs to be built into any long-term fleet or personal car planning. The ICAEW has published useful commentary on the direction of travel for electric vehicle taxation for those who want a broader professional perspective.
How Our Tax Advisors Can Help You
Company car tax is not static and the next five years represent a meaningful increase in the cost of providing or driving a company car — particularly for low-emission vehicles that were originally chosen for their tax efficiency. The time to act is before the changes take effect, not after they appear on a payslip or P11D.
Our team works with both employees and employers on exactly this. We can review your current position, model the impact of the upcoming changes on your specific vehicle and circumstances, and help you consider whether changing your car, adjusting your fleet policy or exploring a salary sacrifice arrangement makes financial sense. For employers, we also look at the Class 1A NICs picture across the fleet as part of our employment tax PAYE work.
The practical point our advisors always return to is this: when choosing or changing a company car, you need to look at where the tax rules are heading over the life of the vehicle — not just where they stand today. That is the kind of forward-looking advice our team provides as standard. If you would like to understand your company car tax position and explore your options, get in touch with us through our tax planning and advisory service.
This article is for general guidance only and does not constitute personal tax advice. Individual circumstances vary. Please speak to a member of our team for advice tailored to your specific situation.