Taxation of company cars in 2026/27 and beyond

Despite the associated tax charge, company cars remain a popular benefit. In recent years, electric and low emission cars have enjoyed a number of tax breaks, and employees making green choices have been rewarded with low tax bills. However, as more people embrace electric and hybrid cars, it is become too costly for the Government to maintain these tax breaks at their current levels, consequently, while all company car drivers will face rises over the next four years, those driving lower emission cars are the hardest hit.

Tax charge on company cars

Where a car is made available for an employee’s private use without any transfer of ownership in the vehicle, a tax charge arises under the benefit in kind legislation (ITEPA 2003, Pt 3, Chapter 6).

The amount charged to tax depends predominantly on the list price of the car and any optional accessories and the cars CO2 emissions. The CO2 emissions determine the appropriate percentage for the tax year, which is applied to the list price (as reduced for capital contributions up to £5,000) to arrive at the amount charged to tax. This is adjusted to reflect qualifying periods of unavailability, and reduced for any contributions made by the employee as a condition for the car being available for private use.

If the car is a diesel car which does not meet emission standards, a supplement of 4% is added to the appropriate percentage. However, this supplement cannot take the charge above the maximum for the tax year.

Employers also face a charge as they are liable for Class 1A National Insurance contributions (currently at 15%) on the taxable amount.

The appropriate percentage

 For 2025/26 the appropriate percentage ranges from 3% for electric cars and hybrids with CO2 emissions of 1-50g/km and an electric range of 130 miles or more to 37% for cars with CO2 emissions of 155g/km and above. Where a car’s with CO2 emissions fall in the 1-50g/km band, the appropriate percentage also depends on the car’s electric range, with different bands applying depending on whether the electric range is less than 30 miles, between 30 and 39 miles, between 40 and 69 miles, between 70 and 129 miles or 130 miles or more.

Drivers of cars with CO2 emissions of 74g/km or less face tax increases in 2026/27. The appropriate percentage for cars with CO2 emissions in the 70-74g/km and lower bands are increased by one percentage point in 2026/27. This means that drivers of electric cars or hybrids with a range of at least 130 miles pay 4% in 2026/27.

However, drivers of cars with CO2 emissions of 75g/km or more pay the same in 2026/27 as in 2025/26. This creates an unusual situation whereby drivers with cars in the 70-75g/km band pay the same as those in the 75-80g/km band, namely 21% in 2026/27. The maximum charge remains at 37%, applying to cars with CO2 emissions of 155g/km. The diesel supplement for cars not meeting emission standards remains at 4%.

This trend of increasing charges at the lower end of the emissions scale continues for 2027/28 with the appropriate percentage increasing by one percent for cars in the 65-69g/km band and below. This takes the appropriate percentage for electric cars and hybrids with an electric range of 130 miles or more to 5%. The charge for cars with CO2 emissions of 70g/km and above remains at the same level as in 2025/26 and 2026/27. This means that in 2027/28, an appropriate percentage of 21% applies to all cars with CO2 emissions between 60g/km and 79g/km. The maximum charge remains at 37%, applying to cars with CO2 emissions of 155g/km and above, and the diesel supplement remains at 4%.

There are more significant changes in 2028/29. The appropriate percentage for zero emissions cars rises by two percentage points to 7%. For 2028/29 and later tax years, all cars in the 1-50g/km band have the same appropriate percentage regardless of their electric range.

The appropriate percentage for cars in this band is set at 18% for 2027/28. This is a significant rise, particularly for drivers in this band whose cars have a good electric range. For example, the appropriate percentage for a car with an electric range of 130 miles or more rises from 5% in 2027/28 to 18% in 2028/29 which is a rise of 13 percentage points.

For all other emissions bands, the appropriate percentage increases by one percentage point in 2028/29. The maximum charge also rises to 38% and applies to cars with CO2 emissions of 155g/km.

Similar rises apply for 2029/30, with the appropriate percentage for zero emissions cars rising by two percentage points while the appropriate percentage for other bands rises by one percentage point. This takes the charge for electric cars to 9%. The maximum charge rises to 39%, applying to cars with CO2 emissions of 155g/km and above.

Impact of the rises

The changes in the appropriate percentages over the year from 2026/27 to 2029/30 inclusive do not hit all drivers evenly.

The appropriate percentage for electric cars rises from 3% in 2025/26 to 9% in 2029/30. For a car with a list price of £30,000, a higher rate taxpayer will pay £720 more in tax in 2029/30 than in 2025/26. For a basis rate taxpayer, the increase is £360. In both 2028/29 and 2029/30, a higher rate taxpayer will face an annual increase of £240, while a basic rate taxpayer will face an annual increase of £240, while a basis rate taxpayer will face an annual increase of £120.

Hybrid drivers face some of the greatest hikes, particularly those who drive cars with a good electric range. Drivers in the 1-50g/km band with a car with an electric range of 130 miles or more pay 3% in 2025/26. This rises to 4% for 2026/27, 5% for 2027/28, 18% for 2028/29 and to 19% for 2029/30. On a car with a list price of £30,000 car with CO2 emissions of 75g/km will pay the same tax in 2026/27 and 2027/28 as in 2025/26. However, if the driver is a higher rate taxpayer, their tax will increase by £120 in both 2028/29 and 2029/30.

At the top end of the scale, drivers with cars of 155g/km or above suffer the maximum charge of 37% in 2025/26, 2026/27 and 2027/28. However, the charge rises to 38% in 2028/29 and to 39% in 2029/30.

Easements for plug-in hybrid electric vehicles

At the time of the November 2025 budget, the Government announced an easement for drivers of plug-in hybrid electric vehicles (PHEVs), applying retrospectively from 1 January 2025.

The easement mitigates the increase in the benefit in kind tax charge for PHEVs that would otherwise apply as a result of new emission standards.

New European Union (EU) and United Nations (UN) emission standards introduced from 1 January 2025 found PHEVs to have higher emissions figure means a higher appropriate percentage, this would mean that the taxable amount of a car would increase.

Where a PHEV was first registered on or after 1 January 2025 and has an emissions figure of 51g/km or more, if it was registered under an emissions standard other than Euro 6D-ISC-FCM or Euro 6E and has an electric range of 1 or more, the car is treated as having a nominal CO2 emissions figure of 1. This means that it is taxed by reference to the appropriate percentage for it’s electric range in the 1-50g/km band rather than by reference to the appropriate percentage for it’s actual CO2 emissions figure.

The easement applies to cars first registered on or after 1 January 2025 and on or before 5 April 2028. Where an employee has a car on 5 April 2028 which is within the scope of the easement, the easement will continue to apply until 5 April 2031 or, if earlier, the date on which the arrangements under which the car is provided are renewed or varied.