IT contractors and company car tax – with examples (2026/27)

If you’re a contractor or small business owner, you may have considered buying a car via your own limited company.

There are some key tax points to consider when deciding between a company car and claiming mileage on your own vehicle.

This article has been updated for the 2026/27 tax year

Use of a personal vehicle for business purposes

Many contractors use their own vehicles for business purposes and recover mileage costs from their companies. Since 2011, HMRC has allowed taxpayers to claim:

• 45p per mile for the first 10,000 business miles travelled.
• 25p per mile for any additional business mileage.
• 24p per mile for motorcycles.
• 20p per mile for normal bicycles.

Additionally, if you transport a co-employee somewhere for business purposes, you can claim an extra 5p per mile passenger allowance.

The calculation is simple, with no reporting requirements, and you avoid benefit-in-kind charges and increased National Insurance rates that apply to company-owned cars.

You might also want to read HMRC’s approved mileage rates page to double-check the latest rates.

Company Owned Vehicle

The tax implications become more complicated if you purchase a vehicle via your limited company.

Benefit in Kind taxes

Since 6th April 2002, the Benefit in Kind charge for company cars registered from 1 January 1998 is calculated as a percentage of the car’s price, linked to CO2 emissions and fuel type.

• The value of the company car is determined by the official list price, regardless of any dealer discounts you may have received.
• If you are a director or employee of a limited company, your use of a company car is taxed as a benefit in kind (BIK), reported each year on your P11D form.
• Your company (as the employer) must pay an additional 15% National Insurance Contributions (NICs) on the value of the benefit each tax year.
• You (as the employee) will pay additional income tax on the value of the benefit.
• On the positive side, the company’s Corporation Tax bill is reduced, as funds used to pay for the vehicle would otherwise be taxed at a minimum of 19%.
• The cost to the company is spread over time in accordance with capital allowance rules.

Example of company car tax in 2026/27

In addition to the tax charge for using the company car, this benefit is also taxed if your company pays for fuel. See below.

Your company purchases a new petrol-powered car with a list price of £30,000. The car emits 110g/km of CO2.

• According to the 2026/27 BIK bands, the official company car tax rate is 28%.
• Car benefit value: £30,000 x 28% = £8,400.
• If you are a higher rate taxpayer (40%), you will pay £3,360 per year.
• If you are a basic rate taxpayer (20%), you will pay £1,680 per year.
• Your company must also pay Employers’ NICs @ 15% on the car benefit value (£1,260).

What happens if my company pays for fuel too?

Unfortunately, if your limited company pays for your fuel, there is an additional tax charge – on top of that!

• For 2026/27, this is calculated by multiplying the car benefit percentage (28% in the example) by a fixed amount (£29,200).
• Fuel benefit value: 28% x £29,200 = £8,176.
• Tax for employees:
  • Basic rate taxpayers (20%) pay £1,635.20.
  • Higher rate taxpayers (40%) pay £3,270.40
• Employer’s NICs @ 15% = £1,226.40

So, even if you buy a company car, paying for fuel out of your own pocket may make sense, since the fuel tax is significant.

You can see the latest fixed fuel multiplier rate here on GOV.UK.

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Benefit in kind rates for zero-emission vehicles from April 2020

As you can see from this table of BiK rates (based on emissions), rates for all car types continue to increase from 2025/26 onwards.

• The rate for zero-emission vehicles rose from 3% (2025/26) to 4% in 2026/27 and will continue increasing gradually to 9% by 2029/30.
• Note that a 4% surcharge applies to diesel vehicles that do not meet the RDE2 standard.

HMRC company car and fuel benefit calculator

There are quite a few online calculators for working out your tax liability. Try the official HMRC company car and fuel benefit calculator to start with.

To summarise

For IT contractors and small business owners, using a personal vehicle for business and claiming mileage allowance relief is often the most tax-efficient option.

If you decide to buy a company car, your tax liability will largely depend on CO2 emissions. Tax rates can reach 37% for high-emission vehicles, whereas the example in this article used a rate of 28%.

Although the vehicle’s capital cost can be offset against Corporation Tax, other factors, such as capital contributions and maintenance costs, should also be considered.