Does a Company Car Get Added to Your Salary? — What UK Law Says
- Jerelyn Aglibao
- 2 days ago
- 3 min read
When your employer gives you a company car, it's tempting to think: “Is this just like extra pay?” In some ways, yes — but not quite how salary in the traditional sense works. In the UK, a company car is treated as a benefit-in-kind (BiK), not as straightforward cash salary. Here’s how that works, and what it means for your tax.
What Is a Benefit-in-Kind (BiK)?
A benefit-in-kind is any non-cash benefit from your employer that has value — for example, private use of a company car.
Earnings for Income Tax purposes include not just your wages, but also these kinds of benefits.
For company cars, the taxable “value” (or cash equivalent) depends on: the car’s list (P11D) price, its CO₂ emissions, and the type of fuel used.
How Is the Taxable Value of a Company Car Calculated?
According to GOV.UK, the benefit is based on a cash equivalent, which is:
list price of the car when new (including accessories) × an “appropriate percentage” based on CO₂ emissions.
Employers report this on a P11D form (or via payrolling).
If the employer payrolls the benefit, they divide the annual cash equivalent by 365 then multiply by the number of days in the pay period to figure out how much to add to your taxable pay that month.
Example: If your car’s cash equivalent is £5,200 for the tax year, and you're paid monthly: £5,200/12 = £433.33. So each month, £433.33 is added to your pay for tax purposes.
What Percentage Applies?
The “appropriate percentage” varies depending on CO₂ emissions and fuel type.
For the 2025/26 tax year, BiK rates increased by 1% in most bands.
For example, fully electric cars (0 g CO₂) are taxed at 3% in 2025/26.
Do You Pay Income Tax on That Benefit?
Yes — you pay Income Tax on the value of the BiK, just as if that amount were extra salary.
Suppose you’re on the basic rate (20%) and your car’s taxable benefit is £5,000: your tax would be £1,000.
If you're a higher-rate taxpayer (40%), the same benefit would cost you £2,000 in tax.
Also, your employer pays Class 1A National Insurance on the benefit.
What About Salary Sacrifice Cars?
Many companies offer salary sacrifice for company cars — meaning you give up part of your salary in exchange for the car.
For petrol/diesel cars, you pay tax on the higher of:
The BiK cash equivalent, or
The gross salary you sacrificed.
For ultra-low emission vehicles (ULEVs) / electric cars, taxation tends to be more favourable: often, only the BiK value applies.
Salary sacrifice reduces your gross salary, which may help reduce income tax and National Insurance, but you still pay BiK.
So, Is a Company Car “Added to Your Salary”?
Not exactly your salary, but yes — its cash equivalent is added to your pay for tax purposes.
That means you pay income tax on that “added” amount, even though you didn’t get it as cash.
For payroll, the BiK is converted into a monthly amount (if payrolled) and included in your taxable pay.
If you use a salary sacrifice scheme, things can be more complex — but the principle is the same: you’re taxed on the greater relevant value (salary foregone vs cash equivalent), depending on car type.
Why Does This Matter?
Tax Planning: Choosing a low-emission car can significantly reduce the BiK rate.
Cash Flow: If your employer pay-rolls the benefit, your monthly PAYE code will reflect the extra “salary,” which can affect take-home pay.
NICs: Your employer incurs NIC costs (Class 1A) on the benefit — relevant for business decision-makers.
Salary Sacrifice Decision: You need to run the numbers — sometimes salary sacrifice saves you money on tax and national insurance, but depending on your car, the BiK cost could outweigh that.
Key Take-Home Points
A company car doesn’t just mean “free car” — it’s a taxable benefit.
HMRC treats it by converting the car’s value (adjusted for emissions) into a cash equivalent, then taxing that as if it's extra pay.
The BiK rate depends on emissions, and for electric cars it's relatively low (3% in 2025/26).
Whether via P11D or payrolling, the taxable value gets added into your PAYE system.
Salary sacrifice schemes complicate but don’t eliminate the BiK tax liability — especially for non-ULEVs.
