How to reduce your company car tax bill

To mangle an old saying, only two things are certain in this world: death and company car tax. You can't avoid the first, and however hard you try to dodge the second, you'll always end up paying something. 

Company cars are quite the cash cow for the Treasury. There were 840,000 Brits paying company car tax in 2023/24, according to the latest figures from His Majesty’s Revenue & Customs, raking in a combined £3.27 billion for the Treasury. 

However, to misappropriate another phrase, the times they are a-changin'. The UK is on course to phase out all but zero-emission vehicles within a decade, and company car tax is an important lever in that process. 

In fact, the rates for plug-in hybrid (PHEV) and electric vehicles (EVs) have become so favourable that uptake has increased by 120,000 people since the system was overhauled in April 2020.

Although the incentives have softened a bit, and the goalposts will continue to move over the next few years, it’s still a great time to opt into a company car if your employer offers you one. But there are a few additional hacks that can help keep your bills as low as possible.

How does company car tax work?

It’s worth understanding this as a baseline. If your employer issues you with a car as part of your job, and you’re able to use it outside work hours (and, yes, that includes commuting) then it’s classed as a ‘Benefit-in-Kind’ and you’ll pay tax for that privilege.

Effectively, HMRC treats company cars as a form of additional income, with a slightly convoluted way of calculating their equivalent cash value. Each vehicle is assigned what’s called a ‘taxable value’ – which is a percentage of its list price (or P11d) banded based on its CO2 emissions and (for most PHEVs) the electric range.

As a driver, you’ll then pay Benefit-in-Kind tax on that value at the same as your salary (usually 20%, 40% or 45%, unless you’re in Scotland). The resulting tax bill is usually much lower than the cost of financing the same car privately, as shown by the following example:

P11D value of the car: £30,000CO2 emissions: 95g/kmFuel type: Petrol HybridCar's BIK rate: 25%User's income tax band: 20%Car's BIK value (P11d x BIK rate): £7,500Tax charge (BIK value x income tax band): £1,500 a year or £125 per month

How can I reduce my company car tax bill?

Choose an EV

If you’re looking to make the biggest impact on your tax bill, then there’s no substitute for going electric.

HMRC has spent almost 25 years using company tax to incentivise low-CO2 cars, and EVs (which are rated at 0g/km) are currently taxed at just 4% of their list price. With even the most efficient petrol cars coming in at 25%, going electric can shave around 80% off your tax costs.

Coupled with longer ranges and faster charging times, it’s hardly surprising that drivers have flocked to go electric since the ultra-low rates came into effect in April 2020. In 2020/21, only 52,000 drivers (7% of the total) were in an EV, but that had grown to 342,000 (a massive 41% of all company cars) in 2023/24. 

However, that popularity hasn’t gone unnoticed. Despite the 120,000 additional company car drivers in 2023/24, the total tax take had fallen from £4.62 billion to £3.27 billion over that period. That’s why EVs will get some of the steepest rises in company car tax between now and the end of the decade, though you’ll still be paying less than anything with a combustion engine by that point.

Or choose a hybrid

If you are not ready to ditch combustion engines completely, the BiK rates also heavily incentivise PHEVs with the longest electric range heavily enough to offset their higher list price. 

For example, with an electric range of 70 miles, the Skoda Superb SE Technology PHEV falls into the 7% BiK band, whereas the equivalent diesel is taxed at 32% of its list price. Despite the hybrid’s £3,280 price disadvantage, it would cost a 40% income taxpayer £97 per month, compared to £407 for the TDI. 

Again, those incentives are being wound down. From April 2028, PHEVs emitting 50g/km or less will be lumped into a single 18% tax band. That’s enough to nudge the Skoda from £110 to £248 per month, but it’s still a lot lower than the diesel at £419. 

Be selective with options

In 2017, Europe’s automotive industry switched to a new fuel efficiency test, catchily known as the worldwide harmonised light vehicles test procedure, or WLTP. 

Alongside tougher test conditions, it produces more granular data, including recognising differences between trim levels and the effects of optional equipment on efficiency. It’s worth double-checking that the larger wheels or panoramic sunroof you’ve just selected don’t push the car into a higher tax band.

That’s especially true for PHEVs, where a single tax band can have a proportionately large effect on your tax bill. Upgrading the Mercedes-Benz E300de from AMG Line Premium to AMG Line Premium Plus trim robs just one mile of its electric range, but it takes it from the 7% to 10% tax band. Coupled with the higher list price, the result is an additional £2,817 tax bill over the next three years.

Look out for fleet trims

Fleets and leasing companies have enough buying power to negotiate discounts on new cars that wouldn’t be available to private buyers. Unfortunately, this isn’t reflected in the list price, so those discounts won’t result in lower Benefit-in-Kind for drivers. 

Instead, to help pass those savings on, some manufacturers offer fleet-focused trim levels that add essential kit but effectively build those discounts into the list price instead of offering discounts. This offers reduced benefit-in-kind payments compared to an equivalent retail-focused version.

Be open-minded

Company car drivers have never had more options. There are nearly 60 different brands available in the UK, a fifth of which weren’t sold here five years ago, so it pays to shop around if your choice list allows you to.

Prolific newcomer the Jaecoo 7 SHS PHEV, for example, has a list price of £36,335 and 56-mile EV range in flagship Black Luxury trim. Fleet stalwart the Kia Sportage GT-Line PHEV falls into the same 10% BiK bracket, but its higher P11d price (£40,570) would cost a 40% income taxpayer an extra £660 over three years.