Part of our complete guide to employer payroll.
How company car tax actually works
If your employer provides a car you can use privately, not just for work journeys, HMRC treats that as a Benefit in Kind, taxed based on a percentage of the car's list price, with the percentage set according to the car's CO2 emissions. Higher emissions mean a higher percentage, and therefore a bigger taxable benefit added to your income.
Why electric cars sit in a different world entirely
Because fully electric vehicles produce zero tailpipe emissions, they sit in the lowest Benefit in Kind band available, a rate dramatically below what a petrol or diesel car of equivalent value attracts. The gap is large enough that, for a company car genuinely needed for the role, switching the fleet to electric has become one of the more effective, and entirely legitimate, ways to reduce both employee and employer tax cost.
Key point: The saving isn't limited to the employee. Employer Class 1A National Insurance on company car benefits is calculated using the same percentage, so the employer pays substantially less NI on an electric company car too, the saving runs both directions.
Where plug-in hybrids sit
Plug-in hybrids don't get the full EV treatment. They're taxed on a sliding scale that factors in both CO2 emissions and the car's electric-only driving range, longer electric range means a lower rate, but even the best plug-in hybrids land well above a fully electric car's rate. If you're choosing between a hybrid and a full EV purely on tax grounds, the full EV almost always wins.
Salary sacrifice and electric cars
Salary sacrifice arrangements are generally restricted by anti-avoidance rules that tax the benefit on the higher of the salary given up or the cash value of the benefit, which normally removes most of the tax advantage of sacrificing salary for a benefit. Electric vehicles are specifically excluded from that restriction, so an EV provided through salary sacrifice keeps its favourable low-BIK tax treatment, making EV salary sacrifice schemes genuinely tax-efficient in a way most other salary sacrifice benefits no longer are.
- Fully electric: lowest available BIK rate, the clearest tax win
- Plug-in hybrid: middling rate depending on electric range, better than petrol/diesel but well behind a full EV
- Petrol or diesel: highest rates, scaling up with emissions
Thinking about switching your fleet to electric? Book a free consultation and we'll work through the actual tax saving for your specific vehicles and employees, as part of our payroll service.
Frequently asked questions
Why is Benefit in Kind tax so much lower on electric company cars?
Benefit in Kind rates are banded by CO2 emissions, and electric vehicles produce none while driving, so they sit in the lowest available band, far below the rate charged on a comparable petrol or diesel car.
Does the employer also save money on an electric company car?
Yes, employer Class 1A National Insurance on the benefit is calculated using the same low BIK percentage, so the employer's NI cost is also significantly lower on an electric vehicle.
Is a plug-in hybrid taxed the same as a fully electric car?
No, plug-in hybrids are taxed on a sliding scale based on both CO2 emissions and electric-only driving range, generally landing well above a fully electric vehicle's rate but still below most petrol or diesel equivalents.
Does salary sacrifice for an electric car affect the tax position?
Electric vehicles are specifically carved out of the anti-avoidance rules that otherwise restrict salary sacrifice tax benefits, so an EV arranged through salary sacrifice keeps its low BIK treatment rather than being taxed on the higher of the two values.