From 6 April 2027, employers will generally need to report company cars, car fuel, vans, van fuel and employer-funded medical benefits through payroll and Real Time Information (RTI). Income Tax and Class 1A National Insurance will be calculated during the tax year instead of mainly through year-end reporting.

The reform changes how benefits are reported and taxed, not how company-car Benefit-in-Kind (BIK) is calculated. Existing BIK rules remain, although some company-car tax percentages will increase from 2027/28.

Key highlights:

• Start date: 6 April 2027
• Benefits covered: Company cars, car fuel, vans, van fuel and employer-funded medical benefits
• Reporting method: Payroll software and RTI
• Employee tax: Collected during the tax year
• Employer NIC: Class 1A reported in real time
• From April 2028: Most other benefits are expected to join mandatory payrolling
• Not included: Employment-related loans and accommodation
• Electric-car BIK: Zero-emission rate rises from 4% to 5% in 2027/28

A temporary first-year easement will apply to some non-deliberate inaccuracies, although normal late-filing and payment rules will still apply.

What Are the HMRC Company Car Tax Changes from April 2027?

From April 2027, affected company car Benefits in Kind will move into mandatory real-time payroll reporting. Employers will calculate the taxable benefit and report it through payroll alongside normal earnings.

The main changes include:

• Reporting company-car benefits through payroll software and RTI
• Including the taxable amount in each relevant pay period
• Collecting employee tax closer to when the benefit is received
• Using a reasonable estimate where final information is unavailable
• Revising the taxable value when more accurate details are received
• Reducing reliance on year-end reporting and later PAYE code adjustments

The underlying calculation will remain. List price, accessories, CO₂ emissions, electric range, availability and employee contributions will still determine the taxable benefit. The reform mainly changes reporting, collection and timing.

Why Is HMRC Moving Company Car Tax into Real-Time Payroll?

HMRC aims to modernise Benefit-in-Kind reporting, reduce retrospective adjustments and make tax calculations more accurate and timely. The policy is intended to simplify reporting for employers while giving employees clearer information about their current-year tax liabilities.

Why is the Reform Being Introduced?

• Tax will be collected closer to when the benefit is received
• Employees should see their liabilities more clearly
• Employers will use established payroll and RTI processes
• Fewer cases should rely on later tax-code adjustments
• Benefit records should become more consistent and up to date

However, implementation may initially increase workloads. Payroll teams will need accurate information from HR, fleet, finance, leasing providers and employees. Incorrect emissions data or delayed vehicle updates could lead to wrong deductions and later corrections.

In 2024/25, company-car benefits had a provisional taxable value of £3.07 billion, with reported Income Tax and National Insurance liabilities of about £1.14 billion and £440 million.

Which Company Cars, Vans and Fuel Benefits Will Fall Within the New Rules?

The April 2027 changes will initially apply to a defined group of taxable benefits rather than every Benefit in Kind. Employers must therefore identify which vehicles, fuel arrangements and medical benefits fall within the first phase.

Benefits Included From 6 April 2027

Phase one covers:

• Company cars available for private use
• Employer-funded private car fuel
• Taxable company vans
• Employer-funded private van fuel
• Employer-provided medical benefits

A company car is generally taxable when it is available to an employee or director for private use. Travel between home and a permanent workplace normally counts as private use, although qualifying temporary-workplace journeys may be treated differently.

Car fuel benefit is separate from the company-car benefit. It may arise where the employer pays for private fuel and the employee does not fully reimburse the cost under the relevant rules. Provisional figures recorded 40,000 car-fuel benefit recipients in 2024/25.

Which Benefits Stay Outside Phase One?

Most other Benefits in Kind are expected to enter mandatory payrolling from 6 April 2028. Employer-provided loans and accommodation remain outside the mandatory timetable for now and may continue under existing year-end reporting or voluntary payrolling arrangements.

This phased approach means that claims that all P11D reporting will end in April 2027 are inaccurate. Some benefits and specialist cases will remain outside phase one, with further rules expected through legislation and HMRC guidance.

How Will the April 2027 Rules Change Employer Payroll and Reporting Duties?

Employers will need company car and fuel information before the relevant payroll is processed. The annual cash equivalent will generally be allocated across the employee’s pay periods, with revisions made when the taxable value changes during the year.

Employer reporting priorities

• Record the vehicle’s start, replacement and withdrawal dates.
• Confirm its list price, accessories, fuel type and emissions.
• Obtain the electric-only range for relevant plug-in hybrids.
• Track when private fuel is provided or withdrawn.
• Send the taxable value through the appropriate payroll submission.
• Report and pay Class 1A National Insurance through the new process.
• Correct estimates when more accurate information becomes available.
• Give employees an annual statement of benefits provided and payroll.

Employers currently report company-car changes through payroll software, an online service or P46(Car), with year-end and Class 1A duties also applying.

From April 2027, businesses should assign clear responsibility for updating payroll when vehicles, fuel benefits or employee contributions change.

How Will the Changes Affect Employees and Company-Car Drivers?

Employees are likely to have tax on affected benefits collected more directly through payroll. This does not necessarily create a new liability; it changes when and how an existing liability is paid.

Take-home pay may change, particularly where an employee is also repaying tax from an earlier year through their tax code. Where overlapping deductions create financial pressure, an earlier underpayment may sometimes be spread over more than one tax year.

Key points for employees include:

• PAYE deductions generally cannot exceed 50% of cash pay in a pay period
• Uncollected amounts may be carried forward or reconciled later
• Vehicle, fuel and availability records should be checked carefully
• Incorrect start dates or outdated car details may lead to wrong deductions

Drivers should report any errors promptly so payroll can apply the correct company-car tax amount.

Will HMRC Company Car Tax Rates Also Change in 2027/28?

Yes. The reporting reform and the Benefit-in-Kind rate changes happen in the same tax year, but they are separate policies.

For a zero-emission company car, the appropriate percentage rises from 4% in 2026/27 to 5% in 2027/28.

Rates for cars emitting between 1g and 74g of CO₂ per kilometre also rise by one percentage point, subject to a maximum appropriate percentage of 21%.

Rates for cars emitting 75g/km or more are generally maintained at their existing level until 5 April 2028, with the overall percentage capped at 37%.

The relevant company car tax rates should be checked for the correct tax year before payroll calculations or vehicle comparisons are completed.

The Benefit-in-Kind percentage is not the employee’s final tax rate. It is used to calculate the taxable value, which is then taxed at the employee’s applicable Income Tax rate.

These changes are also separate from Vehicle Excise Duty, commonly called road tax.

How Is Company Car Tax Calculated Under the New System?

The April 2027 reform changes how company car tax is reported and collected, but it does not replace the existing Benefit-in-Kind calculation. Employers will still need accurate vehicle and employee data to determine the taxable amount.

The Benefit-in-Kind Formula

The basic calculation remains:

Taxable vehicle value × appropriate BIK percentage = annual taxable benefit

The employee’s indicative tax cost is then:

Annual taxable benefit × Income Tax rate = indicative annual tax

The taxable car value is generally based on the manufacturer’s list price, including VAT and taxable accessories. It is not necessarily the amount paid by the employer or the monthly lease cost.

The final figure may also be affected by:

• The period the car was available
• Employee capital contributions
• Qualifying payments for private use
• Taxable accessories added after delivery

How Should the Official Calculator Be Used?

Employers can use payroll software or the company car benefit calculator to estimate the taxable value.

Required information may include:

• Manufacturer’s list price
• Fuel type
• Official CO₂ emissions
• Availability dates
• Taxable accessories
• Approved electric range for qualifying plug-in hybrids

For plug-in hybrids emitting between 1g/km and 50g/km, the approved zero-emission mileage may be obtained from the certificate of conformity, leasing company or fleet provider.

The result is only reliable when verified information is used. Employers should not estimate the list price, emissions or electric range where accurate records are available

Worked Example: A £40,000 Electric Company Car

Consider a fully electric company car with a taxable value of £40,000. In 2026/27, the 4% BIK rate creates an annual taxable benefit of £1,600.

The indicative tax cost is:

• 20% taxpayer: £320 a year
• 40% taxpayer: £640 a year

In 2027/28, the 5% BIK rate creates an annual taxable benefit of £2,000.

The indicative tax cost becomes:

• 20% taxpayer: £400 a year
• 40% taxpayer: £800 a year

The one-percentage-point increase therefore adds £80 a year for a basic-rate taxpayer and £160 for a higher-rate taxpayer in this simplified example.

Actual payroll deductions may differ because of availability, accessories, employee contributions, tax-code changes or later corrections.

How Can Drivers Check or Update Their Company Car Details With HMRC?

Under the current system, eligible employees can use HMRC’s online service to check the company car information held about them, report changes made since 6 April and update employer-provided fuel details. Any change submitted may affect the employee’s tax code.

Drivers may need to provide:

• The vehicle’s list price, including VAT
• The value of any taxable accessories
• The official CO₂ emissions figure
• The diesel emissions standard, where relevant
• The approved electric-only range for qualifying hybrid cars

The online service cannot be used in every situation.

Employees may need to contact their employer or HMRC directly where:

• The employer already manages the benefit through payroll
• The employee is part of a car-sharing or averaging arrangement
• The change concerns a commercial vehicle, such as a van

Once mandatory payrolling begins in April 2027, employees should check their payroll and company-car records carefully. These details will directly influence real-time tax deductions, so incorrect vehicle, fuel or availability information should be reported promptly.

What Should UK Employers Do Before 6 April 2027?

Employers should treat the reform as a combined payroll, fleet-data and employee-communication project.

Preparations should include auditing company cars, vans, fuel and medical benefits, checking list prices, accessories, emissions and electric ranges, and confirming which benefits are already payrolled voluntarily.

Businesses should also test payroll software, data transfers, calculation methods, correction procedures and responsibility for reporting vehicle changes.

Clear payslip explanations and employee communications will help reduce confusion once deductions begin.

Employers should therefore monitor final guidance and avoid relying on unconfirmed assumptions.

Early preparation can reduce inaccurate deductions, delayed corrections and employee queries.

Conclusion

Mandatory payrolling from April 2027 will change when and how company-car benefits are reported, but the underlying Benefit-in-Kind calculation will remain.

Employers should prepare payroll systems, verify vehicle data, test reporting processes and explain deductions clearly to employees.

Accurate list prices, emissions, availability dates and electric ranges will be essential.

Early planning will help businesses reduce errors, manage employee queries and comply with the final HMRC rules as further operational guidance becomes available.

Frequently Asked Questions

Does commuting in a company car count as private use?

Usually, yes. Travel between home and a permanent workplace is normally treated as private use. Travel to a qualifying temporary workplace may be treated differently, depending on the facts.

Can company car tax be legally reduced without using loopholes?

Legitimate options may include choosing a lower-emission vehicle, making recognised employee contributions, declining an uneconomic private-fuel benefit or genuinely restricting private availability. Artificial arrangements designed only to disguise private use may be challenged.

Is employer-paid private fuel worth accepting?

Not always. Fuel benefit is calculated separately and may produce a tax charge greater than the value of the private fuel used. The result depends on mileage, fuel costs, the applicable multiplier and the employee’s tax rate.

Does salary sacrifice alter company car tax?

Salary-sacrifice arrangements can be affected by optional remuneration rules. Qualifying low-emission vehicles receive specific treatment, but scheme design and individual circumstances matter. Employers should obtain specialist advice before changing an arrangement.

What happens if a company car is temporarily unavailable?

A qualifying period of unavailability can reduce the taxable benefit, but short absences do not automatically qualify. Accurate dates and the reason for unavailability should be retained, particularly where a temporary replacement vehicle is provided.

What is the £40,000 car tax rule?

The commonly searched £40,000 rule normally refers to the Vehicle Excise Duty expensive-car supplement, not the company car Benefit-in-Kind tax. From 1 April 2026, the threshold for qualifying zero-emission cars increased to £50,000, while the £40,000 threshold remains for other eligible cars.

Will the April 2027 changes alter road tax?

No. The April 2027 measure concerns payroll reporting of Benefits in Kind. Vehicle Excise Duty has separate rates, thresholds and commencement dates.

Editorial Note:

This article distinguishes mandatory payroll reporting from Benefit-in-Kind rate changes and Vehicle Excise Duty. It does not suggest that every company-car driver will pay the same amount or that all year-end reporting will disappear immediately.

Company-car tax depends on the vehicle, its availability, associated benefits and the employee’s circumstances. This is informational, not financial/legal advice.