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Providing a company car creates a taxable benefit in kind for the employee and a Class 1A National Insurance cost for the employer, based on the car's list price and CO2 emissions. Paying an employee or director for using their own car for business journeys at the HMRC-approved mileage rates (45p for the first 10,000 business miles, 25p after that, in a tax year) is usually simpler and tax-free if you stay within the rates. Compare both routes against actual mileage and car choice before committing to either.
Understand the two different arrangements
A company car is owned or leased by the company and made available to a director or employee, including for private use such as commuting. Because the employee benefits personally, HMRC treats this as a benefit in kind, taxed through the 'appropriate percentage' applied to the car's P11D value (broadly its list price including VAT, delivery and most options).
The alternative is for the individual to use their own car and claim mileage for business journeys under the Approved Mileage Allowance Payments (AMAP) scheme. If the company pays no more than the approved rates, the payment is free of tax and National Insurance and there is no benefit-in-kind charge, because the individual already owns and runs the car privately.
How the company car benefit is calculated
The taxable benefit is the car's P11D value multiplied by an 'appropriate percentage' set mainly by CO2 emissions and, for low-emission cars, electric range. For 2025/26 the percentage for fully electric cars is 3%, having increased from 2% in 2024/25, and is due to rise further in later years. Check the current year's published percentage before quoting a figure to an employee.
Higher-emission petrol and diesel cars attract higher percentages, up to a maximum, with an additional supplement for non-RDE2-compliant diesels. The resulting benefit value is added to the employee's income for Income Tax purposes and is also subject to employer Class 1A National Insurance at the Class 1A rate.
| Car type | Approximate 2025/26 appropriate percentage | Who pays what |
|---|---|---|
| Fully electric (0g/km) | 3% | Lower benefit value; still P11D-reportable |
| Low-emission hybrid (1-50g/km, long electric range) | Lower banded percentage based on electric range | Reported on P11D; rate depends on zero-emission mileage |
| Petrol car, moderate CO2 | Mid-range percentage, rising with CO2 | Benefit value increases with emissions |
| Diesel, not RDE2-compliant | Standard percentage plus a diesel supplement | Higher benefit than an equivalent RDE2 diesel or petrol car |
Worth knowing: Always check the current year's official appropriate percentage table rather than relying on a figure from a previous tax year.
Approved mileage rates for using a personal car
The AMAP rates for a car or van are 45p per mile for the first 10,000 business miles in a tax year and 25p per mile after that, with a lower rate for motorcycles and bicycles. These rates are intended to cover fuel, wear, insurance and depreciation for using a personal vehicle, not just fuel.
If the company pays less than the approved rate, the employee can claim Mileage Allowance Relief on the shortfall through their own tax return or by asking HMRC to adjust their tax code. If the company pays more than the approved rate, the excess is a taxable benefit and should be reported.
- 1
Decide which approved rate applies to the vehicle type (car, van, motorcycle or bicycle).
- 2
Record each business journey's date, purpose, start and end mileage.
- 3
Apply 45p for the first 10,000 miles in the tax year, then 25p after that.
- 4
Reimburse through payroll or expenses, keeping the mileage log as supporting evidence.
- 5
Review at each tax year-end whether the 10,000-mile threshold has been reached.
Compare the two routes before deciding
Neither option is automatically cheaper. A company car can suit high annual mileage, a low-emission vehicle with a low appropriate percentage, or where the company wants to control the vehicle and its running costs. Mileage payments can suit lower annual business mileage, where the individual already owns a suitable car, or where simplicity matters more than potential tax savings on an expensive low-emission car.
Run the comparison using the individual's actual expected business mileage, their marginal Income Tax rate, the car's list price and CO2 figures, and the company's Corporation Tax and Class 1A position, rather than general statements about electric cars being 'tax efficient'.
| Factor | Company car favours | Personal car and mileage favours |
|---|---|---|
| Annual business mileage | High mileage with company-funded running costs | Lower or irregular business mileage |
| Car value and emissions | Low list price, low or zero emissions | Any car the individual already owns |
| Administration | P11D/P11D(b) reporting, or payrolling | Simple mileage log and payroll reimbursement |
| Who bears maintenance risk | Company (if it owns or leases the car) | Individual, who sets their own insurance and servicing |
Fuel benefit and company vans
If the company pays for private fuel on a company car and the employee does not fully reimburse the cost, a separate fuel benefit charge applies, calculated using a fixed multiplier set each tax year and the same appropriate percentage used for the car benefit. For many directors with modest private mileage, reimbursing the company in full for private fuel can avoid this charge being worthwhile.
A company van made available for more than minor incidental private use is taxed differently, using separate flat-rate van and van fuel benefit figures rather than a CO2-based percentage, with a reduced or nil charge for vans that are effectively business-use only. Check the current flat-rate figures each tax year.
- A van used solely for business journeys and ordinary commuting generally has no van benefit charge.
- Any additional private use beyond insignificant trips usually triggers the flat-rate van benefit.
- Fully electric vans currently attract a nil or reduced van benefit; check the current year's position.
- Keep a simple log of any private van use to support the benefit position taken.
Keep records that support the position taken
Whichever route is used, HMRC can ask for evidence. For mileage claims, keep a running log by journey, not an end-of-year estimate. For a company car, keep the date it was made available, its list price and options, CO2 figures, and any periods it was unavailable (for example during a long repair), since these can adjust the taxable benefit.
Report company car and fuel benefits either on form P11D after the tax year end, or through payrolling benefits in kind during the year if the company has registered to do so with HMRC in advance. Payrolling removes the need for a P11D for payrolled benefits but still requires the Class 1A National Insurance figure to be reported.
Worked scenario: comparing options for a director
Illustrative scenario: a director drives around 6,000 business miles a year visiting clients, using a car worth about £28,000 if bought through the company, or alternatively could claim mileage on their own three-year-old car worth less. Mileage payments at 45p per mile for 6,000 miles would cost the company £2,700, free of tax and National Insurance if paid within the approved rate.
A company-provided electric car at a 3% appropriate percentage would create an annual benefit value of around £840, taxed at the director's marginal rate, plus employer Class 1A National Insurance on that value. The company would also bear purchase or lease, insurance, and maintenance costs. Which option costs less overall depends on the car's real running costs and how the figures compare year by year, not on a single rule of thumb.
Worth knowing: Model both options using the individual's own mileage and car choice before setting a long-term car or mileage policy.
Your next steps
- Decide whether a company car or personal car with mileage claims suits your actual mileage.
- Check the current year's appropriate percentage table before costing a company car.
- Use 45p per mile for the first 10,000 business miles, then 25p, for personal car mileage.
- Keep a mileage log recording date, purpose and miles for every business journey.
- Register for payrolling benefits in kind in advance if you want to avoid P11D reporting.
- Reimburse private fuel in full if you want to avoid the separate fuel benefit charge.
- Review van usage to confirm whether any private use beyond incidental trips applies.
Common questions
Can a company reimburse more than 45p per mile without tax implications?+
No. Any amount paid above the approved mileage rates is a taxable benefit and should be reported and taxed accordingly, unless it falls within another specific exemption.
Does an electric company car avoid Class 1A National Insurance?+
No. A lower appropriate percentage reduces the benefit value and therefore the Class 1A charge, but it does not remove the requirement to calculate and pay Class 1A on the resulting value.
Can passengers' mileage be claimed separately?+
Yes. A separate passenger payment of up to 5p per mile can be paid tax-free for carrying a fellow employee on a business journey, in addition to the driver's own mileage rate.
Does commuting count as business mileage?+
Ordinary commuting between home and a permanent workplace is not business mileage. Travel to a temporary workplace or between work locations can usually be claimed.
What happens if a company car is unavailable for part of the year?+
The benefit can be reduced for days the car was genuinely unavailable, for example during a lengthy repair, but not for routine periods of non-use.
Is a company car always reported on a P11D?+
It is reported on a P11D unless the company has registered with HMRC to payroll car and fuel benefits in advance, in which case the value is taxed through payroll instead.
Official sources & further reading
This guide draws on the official guidance below. Rules, fees and individual circumstances can change; check the relevant source before acting.
- GOV.UK: Expenses and benefits: company cars and fuel
- GOV.UK: Travel - mileage and fuel rates and allowances
- GOV.UK: Taxation of company cars - appropriate percentage 2025 to 2028
General UK information, primarily for private companies limited by shares. This is not personalised legal, tax or financial advice. An accountant or solicitor can help apply the rules to your situation.
About the author
Maya Patel · Company Formation Offers
Maya covers everything a director must file and pay after incorporation: statutory accounts, Corporation Tax, the confirmation statement, PAYE, VAT and directors’ own Self Assessment. Her guides distinguish Companies House deadlines from HMRC deadlines, show the assumptions behind every calculation and flag where a company’s circumstances mean it should speak to a qualified accountant.
Writes for Company Formation Offers on company tax and compliance. Guidance is general information, not personalised tax advice. Full profile