Key Takeaways
- The benefit in kind rate for fully electric vehicles is 4% in 2026/27, rising to 9% by 2029/30, making electric cars significantly cheaper to run as company cars than petrol or diesel equivalents.
- A 40% taxpayer driving a £40,000 electric car through their limited company pays around £53 a month in personal income tax on the benefit in kind, compared to around £480 a month for a petrol car of the same value at a 36% benefit in kind rate.
- A limited company can recover 50% of the VAT on lease rental payments where the car is available for private use, and can generally recover VAT on the maintenance element in full.
- HMRC does not treat electricity as a fuel for the company car fuel benefit charge, so employer-paid home or workplace charging carries no additional tax liability.
- When choosing a car lease company, check the broker is authorised and regulated by the Financial Conduct Authority and holds membership of the British Vehicle Rental and Leasing Association.
Leasing a car through your limited company can reduce your personal tax bill significantly, but the saving depends almost entirely on which car you choose. With the benefit in kind (BIK) rate for fully electric vehicles confirmed at 4% for 2026/27, a director or employee driving a £40,000 electric car through their company pays around £53 a month in personal income tax on that benefit. The equivalent figure for a petrol car of the same value can be nine times higher. This article explains how company car leasing works, what it costs in tax, how VAT recovery applies, and what to look for when choosing a car lease company.
How benefit in kind works on a company car lease
When your limited company leases a car and you use it for private journeys, including the daily commute, HMRC treats that private use as a taxable benefit. The value of that benefit is added to your personal income for the year, and you pay income tax on it. This is benefit in kind, commonly abbreviated to BIK.
The taxable benefit is not based on what the lease actually costs. HMRC uses the car’s P11D value, which is the manufacturer’s official list price including VAT and delivery charges, not the discounted price your company paid. The BIK percentage applied to that P11D value depends on the car’s CO2 emissions and fuel type.
The formula is straightforward:
Taxable benefit = P11D value x BIK % x your income tax rate
For a £40,000 electric car in 2026/27:
- P11D value: £40,000
- BIK rate: 4%
- Taxable benefit: £1,600
- Annual tax at 20%: £320 (around £27 a month)
- Annual tax at 40%: £640 (around £53 a month)
Your company also pays employer’s National Insurance contributions on the taxable benefit, at 15%. On the example above, that adds approximately £240 a year to the company’s costs. Factor this in when comparing leasing options.
Why electric vehicles make the most sense in 2026
The BIK rate for zero-emission electric vehicles rose from 3% to 4% on 6 April 2026, and HMRC has confirmed the rates through to 2029/30. The schedule is: 5% in 2027/28, 7% in 2028/29, and 9% in 2029/30. Even at 9%, the electric rate will remain a fraction of what petrol and diesel cars attract.
For context, a petrol car emitting 51 to 54g/km carries a BIK rate of 17% in 2026/27. at 15%. On the example above, that adds approximately £240 a year. On a £40,000 petrol car at a 36% BIK rate, the taxable benefit is £14,400 a year. A 40% taxpayer would owe £5,760 in income tax on that benefit, or £480 a month. Compared to £53 a month on the electric equivalent, the difference is material.
One further point on electricity costs: HMRC does not treat electricity as a fuel for the company car fuel benefit charge. If your company pays for home or workplace charging, there is no additional tax liability on that benefit. For business mileage reimbursement, HMRC’s advisory rate for electric vehicles using a home charger is 7p per mile, and 15p per mile for public charging, both effective from 1 June 2026.
VAT recovery and what your company can claim
One of the practical advantages of leasing through a limited company, rather than personally, is VAT recovery on the monthly payments. The rules depend on how the car is used.
If the car is used solely for business purposes, with no private use at all, your company can typically recover 100% of the VAT on the lease rental cost. In practice, most company cars are available for private use, which means the standard recovery is 50%. This applies regardless of how much private use actually takes place. The 50% recovery is a fixed HMRC concession for mixed-use cars on contract hire.
VAT on any maintenance element of the lease is treated separately and can generally be recovered in full, provided the maintenance relates to business use. The specifics of what your company can recover depend on its VAT position and the exact terms of the lease. Speak to your accountant before assuming a recovery rate.
It is also worth noting that fully electric vehicles qualify for 100% first-year allowances (FYA) on the purchase price if bought outright. On a lease, the structure is different, as the rental payments pass through the profit and loss account rather than the balance sheet, but the tax treatment of those payments is still favourable. Your accountant can confirm the corporation tax position for your specific situation.
What to look for when choosing a car lease company
Most company car leases are structured as contract hire agreements. These are fixed-term, non-cancellable contracts, typically running for two to four years. The monthly payment covers depreciation and, if included, maintenance. At the end of the contract, you return the car. You do not own it, and there is no option to buy.
Before signing, check the contract clearly states the mileage limit and the excess mileage charge. Excess mileage charges are applied per mile over the agreed limit at the end of the contract, and they can add up quickly if you underestimate your annual mileage at the outset.
When choosing a car lease company, look for two things in particular. First, check that the broker is authorised and regulated by the Financial Conduct Authority (FCA). The FCA registration number should be clearly displayed on the broker’s website. Second, look for membership of the British Vehicle Rental and Leasing Association (BVRLA). BVRLA members operate under a code of conduct and have access to a formal dispute resolution process, which gives you a route to resolve any issues that arise during or after the contract.
A broker that is both FCA-regulated and a BVRLA member is operating to the standards required of a professional, accountable business.
Getting started with a company car lease
If you are a director or employee of a limited company and you are considering a company car, the numbers in 2026/27 strongly favour a fully electric vehicle. The BIK rate is low, the rates are confirmed well in advance, employer-paid charging carries no fuel benefit charge, and VAT recovery on the lease payments is available.
The next step is to compare electric car lease deals available through your company. Use the figures in this article as a starting point for your tax calculation, and confirm the VAT and corporation tax position with your accountant before committing to a contract.
Frequently asked questions
Yes. A limited company can enter into a contract hire agreement in the company’s name. The monthly payments are a business expense, and the company can recover VAT on those payments, subject to the rules on private use.
The benefit in kind rate for fully zero-emission electric cars is 4% in 2026/27. This rose from 3% on 6 April 2026. HMRC has confirmed the rate will increase to 5% in 2027/28, 7% in 2028/29, and 9% in 2029/30.
It depends on the car’s P11D value, its BIK rate, and your income tax rate. For a £40,000 electric car in 2026/27, a 40% taxpayer pays £640 a year (around £53 a month) in income tax on the benefit. A 20% taxpayer pays £320 a year (around £27 a month).
Your company pays employer’s National Insurance contributions at 13.8% on the taxable benefit value of any company car available for private use. On a £40,000 electric car with a £1,600 taxable benefit, that is approximately £221 a year.
If the car is used solely for business with no private use, a company can typically recover 100% of the VAT on the lease rental. Where private use exists, which applies to most company cars, the standard recovery is 50%. The maintenance element of the lease can generally be recovered in full.
A personal lease (personal contract hire) is taken out in your own name. A company car lease is taken out in the company’s name. With a company lease, the company makes the payments, can recover VAT, and the car is treated as a company asset for accounting purposes. You pay income tax on the private use benefit. With a personal lease, you pay from post-tax income with no VAT recovery.
The tax figures in this article are illustrative, based on a £40,000 car and HMRC benefit in kind rates for the 2026/27 tax year, and are correct as at July 2026. Rates are set by government and change in future Budgets, and your own position depends on the car’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.
