Key takeaways
- The benefit in kind rate for fully electric company cars is 4% in 2026/27, rising to 5% in 2027/28 under already-legislated HMRC rules.
- A VAT-registered business can reclaim 50% of the VAT on lease payments where the car is used for both business and personal journeys, an advantage not available when purchasing.
- The maximum benefit in kind rate in 2026/27 is 37%, applying to petrol cars emitting 155g/km of CO2 or more and diesel cars emitting 135g/km or more.
- Employer Class 1A National Insurance Contributions on company car benefits rose to 15% from 6 April 2026, increasing the cost of providing high-emission vehicles.
- Salary sacrifice for electric cars can still offer a tax saving in 2026 because the 4% benefit in kind rate keeps the taxable benefit value relatively low.
How business car leasing is taxed in 2026/27
Business car leasing is one of the more tax-efficient ways a company can put employees behind the wheel of a new car. But the tax position depends heavily on which vehicle you choose, how it is used, and whether the business is VAT-registered. This article sets out the key numbers for the 2026/27 tax year, covering benefit in kind (BIK) rates, VAT recovery, and the changes that came into effect on 6 April 2026.
Benefit in kind rates for 2026/27
When an employer provides a car that an employee can use privately, HMRC treats that as a taxable benefit. The charge is called benefit in kind, and it is calculated as a percentage of the car’s P11D value. The P11D value is the full list price when first registered, including VAT and any optional extras. It is not the discounted price you may have negotiated.
The formula works like this:
BIK value = P11D list price × BIK percentage
Tax payable = BIK value × employee’s marginal income tax rate
For 2026/27, all BIK rates increased by one percentage point across the spectrum compared to the previous year. The rates now sit as follows:
| Vehicle type | CO₂ emissions | BIK rate 2026/27 |
|---|---|---|
| Fully electric | 0g/km | 4% |
| Ultra-low emission (non-EV) | 1–74g/km | 4–21% |
| Low emission | 75g/km | 21% |
| Higher emission petrol | ≥155g/km | 37% |
| Higher emission diesel | ≥135g/km | 37% |
The 37% rate is the maximum and applies to the most polluting petrol and diesel cars on the market.
To put those numbers into context: a fully electric car with a P11D value of £50,000 generates a BIK value of £2,000 a year (£50,000 × 4%). A higher-rate taxpayer pays £800 a year in personal tax on that benefit (£2,000 × 40%). The employer pays Class 1A National Insurance Contributions on the same BIK value at 15%, which comes to £300 a year.
Run the same calculation on a high-emission diesel with a P11D value of £50,000 and the BIK value jumps to £18,500 a year. The higher-rate taxpayer pays £7,400 in personal tax. The employer’s Class 1A NIC bill rises to £2,775 a year.
The difference in tax cost between an electric car and a high-emission diesel is not marginal. It is substantial enough to change the total cost of running a company car fleet.
What changed on 6 April 2026
Several changes came into effect at the start of the 2026/27 tax year, and businesses need to account for all of them.
- Electric vehicle BIK rate increased from 3% to 4%. It will rise to 5% in 2027/28 and 9% by 2029/30. These future rates are already legislated, which gives fleet managers reasonable certainty when planning multi-year contracts.
- All other vehicle BIK rates increased by one percentage point across the spectrum.
- Employer Class 1A NIC rate increased to 15%.
- Van benefit charge rose to £4,170 a year.
- Van fuel benefit rose to £798 a year.
- Car fuel benefit multiplier increased to £29,200.
The higher-emission vehicle rates (75g/km and above) are frozen until 5 April 2028, so there are no further increases planned for those bands in the near term.
VAT recovery on business car leasing
For VAT-registered businesses, leasing a car through business contract hire carries a significant advantage over buying one outright. The rules work as follows.
If the vehicle is used exclusively for business purposes, with no private use whatsoever, the business can reclaim 100% of the VAT on the lease payments.
If the vehicle is used for both business and personal journeys, including commuting, the business can still reclaim 50% of the VAT on the monthly payments. That 50% reclaim is available regardless of the split between business and personal use.
When a business buys a car outright and there is any personal use, no VAT can be reclaimed at all. The 50% VAT recovery available on a business lease is therefore a meaningful financial advantage over purchase, and it applies even when the car is driven privately.
To illustrate: if the monthly lease payment including VAT is £600, the VAT element is £100. A VAT-registered business with mixed personal and business use can reclaim £50 of that every month. Over a 36-month contract, that is £1,800 recovered.
Vans are treated differently. A VAT-registered business can generally reclaim 100% of the VAT on the lease or purchase of a van used for business purposes, subject to the normal VAT rules and any private-use considerations.
Salary sacrifice and business car leasing
Some businesses offer cars through a salary sacrifice arrangement, where the employee gives up a portion of gross salary in exchange for a leased car. Because the sacrifice is made before income tax and National Insurance are calculated, the employee reduces their taxable income.
For electric cars, salary sacrifice remains an attractive option. The BIK rate of 4% means the tax cost of the benefit is relatively low. A 40% taxpayer sacrificing salary for an electric car with a P11D value of £50,000 pays BIK tax of £800 a year, as shown in the example above, while saving income tax and National Insurance on the sacrificed salary.
One point worth clarifying: salary sacrifice does not change the VAT recovery position. The VAT treatment follows the standard business leasing rules described above. There is no additional VAT advantage from structuring the arrangement as salary sacrifice rather than a straightforward company car.
If the car is available for private journeys, including commuting, it is treated as a taxable benefit and BIK applies. There is no way to avoid BIK on a salary sacrifice car that is used privately.
Choosing the right vehicle for your business lease
The tax case for low-emission and electric vehicles in a business context is clear. A fully electric car at 4% BIK sits at a fraction of the cost of a high-emission diesel at 37%, both in personal tax for the employee and in Class 1A NIC for the employer.
To give a rough sense of monthly costs across vehicle types, business contract hire deals in 2026 typically look like this:
| Vehicle type | Typical monthly payment (incl. VAT) | BIK rate | Approx. monthly tax (40% taxpayer) |
|---|---|---|---|
| Electric (e.g. Tesla Model 3, Hyundai Ioniq 5) | £450–£650 | 4% | £60–£85 |
| Low-emission hybrid (e.g. Toyota Yaris Hybrid) | £350–£500 | 4–7% | £40–£70 |
| Higher-emission petrol/diesel (e.g. BMW 320d) | £500–£800+ | 21–37% | £200–£350 |
The monthly lease payment on a high-emission vehicle may look competitive on paper. Once the employee’s BIK tax is added, the total monthly cost can exceed that of a more expensive electric car with a lower BIK rate.
Work out your business car leasing costs
The tax position on a company car depends on the specific vehicle, the employee’s income tax rate, and how the car is used. If you are comparing vehicles for a fleet or considering a single car through salary sacrifice, it is worth running the numbers before committing to a contract.
To explore current business car leasing deals and compare vehicles by BIK rate and monthly payment, browse our business car leasing section. If you would like guidance on which contract structure suits your business, our team can walk you through the options.
The tax figures in this article are illustrative, based on HMRC benefit in kind rates for the 2026/27 tax year, and are correct as at August 2026. Rates are set by government and can change in future Budgets, and your own position depends on the vehicle’s P11D value, your income and how the car is used. This is general information, not tax advice; confirm your position with HMRC or a qualified accountant.
Frequently asked questions
The benefit in kind rate for fully electric company cars in 2026/27 is 4%, up from 3% in 2025/26. It is already legislated to rise to 5% in 2027/28 and 9% by 2029/30, giving fleet managers reasonable certainty when planning multi-year contracts.
You multiply the car’s P11D list price by the relevant benefit in kind percentage to get the taxable benefit value, then multiply that figure by the employee’s marginal income tax rate (20%, 40%, or 45%) to find the annual tax liability. The P11D value is the full list price including VAT and any optional extras, not the discounted price negotiated with the dealer.
Yes. A VAT-registered business can reclaim 50% of the VAT on lease payments where the car is used for both business and personal journeys, including commuting. If the car is used exclusively for business with no private use at all, 100% of the VAT can be reclaimed. This 50% recovery is not available when a car is purchased outright and used privately.
For electric cars, salary sacrifice can still offer a meaningful tax saving in 2026 because the benefit in kind rate is 4%, keeping the taxable benefit value low. The employee reduces their taxable income through the salary sacrifice while paying benefit in kind tax only on the relatively low benefit value. Whether it is worthwhile depends on the individual’s tax position, salary level, and the specific vehicle chosen.
The maximum benefit in kind rate in 2026/27 is 37%. It applies to petrol cars emitting 155g/km of CO2 or more, and to diesel cars emitting 135g/km or more. This rate is frozen until 5 April 2028, so no further increases are planned for higher-emission bands in the near term.
Leasing allows VAT-registered businesses to reclaim 50% of the VAT on monthly payments where there is personal use, which is not available when purchasing a car outright with any private use. Purchased electric cars may qualify for a 100% first-year capital allowance, but leasing preserves cash flow and provides the VAT recovery advantage throughout the contract term.
