Calculate the tax cost of buying a car through your limited company (2025/26)

If you buy a car via your own limited company, there are several tax considerations to consider. Read this no-nonsense guide to calculate the tax cost for the 25/26 tax year.

We have already looked at the car options available to contractors in a previous article.

You can reclaim fixed mileage costs from your company when using your own vehicle when on business.

Or, you may decide to buy or lease a car through your company.

Which factors influence company car tax rates?

In simple terms, the amount of tax you pay on a company car depends on several factors:

• The list price of the vehicle.
• The CO2 emissions of the vehicle.
• What type of fuel the vehicle uses (petrol, diesel, electric).
• Whether or not your company also pays for fuel.
• Which personal income tax the taxpayer falls into.

How are company car benefits taxed?

If you are provided with a company car, you must pay an income tax charge on the value of the benefit received during the year (the ‘Benefit in Kind’).

Additionally, your company will have to pay Class 1A Employer National Insurance Contributions on the value of the benefit.

To calculate the charge, you will need both the list price and the CO2/g emissions of the car to hand.

To calculate the car benefit charge, multiply the vehicle’s list price by a fixed rate percentage.

Company car tax band percentages for 2025/26 tax year

These rates apply to petrol and electric cars.

Add 4% to the standard rates for diesel cars from 70-75 g/km onwards (up to a maximum of 37%). No premium applies if the diesel car is certified to RDE2 standard.

Once you have the list price and percentage, you can calculate the tax liabilities for yourself (personally) and your company.

Car benefit charge example – registered after 6th April 2021

• So, for a new car with a £30,000 list price and CO2 emissions of 110g/km, the car benefit charge for 2025/26 is 28% of the list price = £8,400.
• You then multiply this charge by the personal income tax band it falls into—basic (20%), higher (40%), or additional (45%).
• So, if you’re a basic rate taxpayer, you will pay extra income tax of 20% x £8,400 = £1,680 (£3,360 if higher rate).
• In addition, your company has to pay Employers’ Class 1A NICs on the value of the charge. In this case, 15% x £8,400 = £1,260.

Car fuel benefit charge – further tax

What if your limited company also pays for the fuel you use?

• To calculate this additional charge, you use the same CO2-based percentage (28% in this example) and multiply it by £28,200 (The Car Fuel Benefit Charge multiplier for 2025/6) = £7,896.
• For the taxpayer, this results in an additional income tax liability of £1,579.20 (basic rate), or £3,158.40 (higher rate).
• Your limited company will be faced with a further Employers’ Class 1A NIC liability of 15% x £7,896 = £1184.40

Enter your own figures into this official car tax calculator.

Important things to bear in mind

• These examples demonstrate how company cars are taxed simply. However, there are many other variables and considerations to bear in mind.
• Generally, salary and any taxable benefits are taxed after the personal allowance, and before interest and dividends are added. This will determine which tax band the car charge falls into. Most contractors will be ‘basic rate’ taxpayers for these purposes if they receive low salaries from their companies.
  
• The capital cost of buying the vehicle is offset against your Corporation Tax bill via capital allowances. As this is spread over the life of the vehicle, you pay less company tax overall.
• You can’t normally reclaim the VAT element on a new car purchase, but you can reclaim the VAT on any running costs.
• You (or your accountant) should inform HMRC if you have acquired a company car, within 28 days of the end of the relevant tax quarter. This will result in an amendment to your tax code, and for your additional tax payments to be collected by the PAYE process.

What if your company leases a car instead of buying one?

Unfortunately, whether your company leases or buys a car, you will still face exactly the same car benefit charge.

So, you will face the same amount of additional income tax, and the company will face the same amount of Employers’ NICs.

However, whereas you can’t generally reclaim the VAT when you buy a car, your company can reclaim 50% of the VAT payable if it leases a car.

So, if the leased car costs £400 + VAT per month, the company can reclaim 50% of the VAT charged (50% x £80 = £40 per month in this example).

Are you better off using your own car?

As this guide demonstrates, company car taxation isn’t particularly simple – especially with so many variables to consider.

You need to consider the cost of:

• buying and running your own car (out of post-tax income), and reclaiming fixed mileage rates from your company.
• buying and running a company car (out of company income), plus the additional personal tax and Employers’ Class 1A NICs.

Remember that the costs of buying and running a car via the company, and the additional NICs are offset against its Corporation Tax bill, as are any fixed mileage rates you reclaim from your company (if using your own car).

Ask your accountant to work out which method is most tax-efficient for you.

Company car tax – useful tools and resources

Use these official tools to help work out the tax cost of leasing or owning a company car:

• Car fuel emissions data
• Government car fuel and fuel benefit calculator