The benefit-in-kind rate on an electric vehicle. A £40,000 EV produces a taxable benefit of just £800 a year — against potentially £14,000 or more for a high-emission petrol car of similar value. It is the largest legitimate perk gap in the UK employment tax system.
A benefit in kind is something of value your employer provides that is not cash. The tax system's position is straightforward: if your employer gives you something worth having, you should pay tax on it much as you would on the salary you would otherwise have needed to buy it yourself.
What confuses people is not the principle but the delivery. Benefits are usually taxed with a delay, through a mechanism that never sends you a bill — it quietly reduces your tax code instead. The result is a payslip that shrinks for reasons the payslip itself does not explain.
The Common Ones
- Company cars — historically the biggest single item, and still the one with the widest range of outcomes.
- Private medical insurance — extremely common, and the benefit most often forgotten when people check their tax code.
- Interest-free or low-interest loans above £10,000 — below that threshold there is generally no charge.
- Gym memberships, and similar paid-for perks.
Some things are deliberately exempt or handled differently — genuine business expenses, certain workplace facilities, and pension contributions, which are not a benefit in kind at all. Our pension tax relief guide covers why pensions sit outside this system entirely.
How It Reaches Your Payslip
The value of the benefit is added to your taxable income. HMRC then usually collects the tax by reducing your tax code, so a smaller slice of your salary is tax-free and slightly more tax comes off each month.
A company car benefit of £5,000 increases the annual tax bill by roughly £1,000 to £2,000 depending on your rate — and that arrives as around £83 to £167 less per month rather than as an invoice. Anyone who has watched their take-home fall without a pay change should check their code before assuming a payroll error. Our tax codes guide explains how to read the adjustment.
The timing lag is the real problem. Benefits are reported after the tax year ends, so a benefit received in one year is often collected through the following year's code — and if the estimate was wrong, an underpayment surfaces a year after that. Someone who takes a company car in year one can face both the ongoing charge and a catch-up for year one arriving simultaneously. Nothing has gone wrong; it is simply how the system sequences.
The Electric Car Gap
Company car tax is calculated from the vehicle's list price and its emissions band, and the gap between the top and bottom of that scale is currently enormous.
| Vehicle | Taxable benefit | Tax at 20% | Tax at 40% |
|---|---|---|---|
| £40,000 electric car at 2% | £800 | £160 | £320 |
| High-emission petrol equivalent | £14,000+ | £2,800+ | £5,600+ |
A higher-rate taxpayer pays around £320 a year for the use of a £40,000 electric car. That is why EV salary sacrifice schemes have become so widespread — the benefit charge is small enough that the sacrifice arithmetic works overwhelmingly in the employee's favour. Our EV salary sacrifice article works through a specific scheme, and company car vs car allowance compares taking the car against taking the cash.
The obvious caveat: benefit-in-kind percentages are set by government and have been scheduled to rise. A three-year lease signed on today's rate will not necessarily run at today's rate throughout, so check the published future rates before committing.
The P11D, and Why You May Never See One
The P11D is the form your employer submits to HMRC listing the benefits you received in the tax year, due by 6 July following the year end. You should receive a copy by the same date.
Increasingly, though, you will not get one. Employers are moving to payrolling of benefits — taxing benefits through the payroll in real time rather than reporting them afterwards and adjusting your code. Where an employer payrolls, the benefit appears on your payslip as it is provided and no P11D is issued for it.
Payrolling is a genuine improvement for employees: the tax is paid in the year the benefit is enjoyed, which removes the lag and the catch-up underpayments that come with it. If your employer offers the choice, the payrolled route is generally the less surprising one.
Checking You Are Being Taxed on the Right Things
Two errors recur, and both cost money in the same direction:
- A benefit you no longer receive still sitting in your tax code. Codes carry forward, so a car handed back or a policy cancelled can keep reducing your allowance until someone tells HMRC. This is worth checking every April.
- An estimated value that is too high. Codes are built on estimates, and an estimate set when the benefit was larger does not update itself.
Both are corrected by contacting HMRC directly, and both are refundable once fixed. Our payslip guide shows where to look, and what to do when your tax code is wrong covers the process.
Frequently Asked Questions
What is a benefit in kind?
Something of value your employer provides that is not cash — a company car, private medical cover, a cheap loan, a gym membership. Its value is added to your taxable income and taxed accordingly.
What is a P11D?
The form your employer submits to HMRC listing the benefits in kind you received during the tax year. It is due by 6 July following the tax year end, and you should get a copy.
How is benefit-in-kind tax collected?
Usually by reducing your tax code, so slightly more tax comes off each month rather than a separate bill arriving. Where an employer payrolls benefits, the tax is instead taken in real time as the benefit is provided.
How much tax do I pay on an electric company car?
Very little by comparison. At the 2% rate for 2026/27, a £40,000 electric car produces a taxable benefit of £800 — about £160 of tax at the basic rate or £320 at the higher rate.
Is a company loan from my employer taxable?
Interest-free and low-interest loans are generally taxable as a benefit above £10,000. Below that threshold there is normally no charge.
Why did my take-home pay fall without a pay change?
Frequently a benefit in kind newly reflected in your tax code, sometimes with a catch-up for a previous year attached. Check the code on your payslip before assuming a payroll mistake.
Related Guides
Keep reading with these related guides:
- How Tax Codes Work — reading the adjustment a benefit creates
- How to Read Your Payslip — where every figure comes from
- Company Car vs Car Allowance — taking the car or taking the cash
- EV Salary Sacrifice Schemes — the arithmetic behind the 2% rate
- Your Tax Code Is Wrong — What Now? — fixing an incorrect code
- How Pension Tax Relief Works — the perk that is not a benefit in kind
- All Tax Guides
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