HMRC Company Car Tax vs Mileage Reimbursement: What Actually Saves Your Business More in 2026?
Your sales team is on the road every week, Manchester on Monday, Bristol by Wednesday, maybe Birmingham squeezed in on the way back. At some point, someone in finance raises the question nobody wants to answer badly: do we put them in a company car, or do we just pay their mileage?
It sounds routine. It is not. Pick the wrong model and you are either handing your employees a surprise tax bill or bleeding money through fleet costs that did not need to exist. And with Benefit-in-Kind (BiK) rates shifting again for 2026/27, the numbers have moved enough that what worked three years ago may not work now.
So here is a proper look at both options, how they actually work under HMRC rules, what the cost difference tends to be, and what you should look at before making a call.
Table of Contents
What Is HMRC Company Car Tax?
Any car your business provides that an employee can use privately, including just the commute, is a taxable benefit in HMRC’s eyes. The employee pays income tax on that benefit. You, the employer, pay 15% Class 1A National Insurance Contributions on it.
The tax is calculated like this:
BiK tax = P11D list price × CO₂ percentage × employee’s income tax rate
The CO₂ percentage is the variable that matters most right now. For 2026/27, the rates are:
- Electric vehicles (EVs): 4% BiK
- Plug-in hybrids: 8–19%, depending on how far they can run on battery alone
- Petrol and diesel vehicles: 25% to 37%, depending on CO₂ output
Put those rates into figures: a £42,000 EV costs a basic-rate (20%) taxpayer around £336 a year in income tax on the benefit. The same £42,000 petrol SUV, once you apply a 37% BiK rate, runs to £3,108 a year for that same person. Same car value. Nearly ten times the tax bill. Your Class 1A NIC obligation as the employer follows the same proportions.
P11D forms are due to HMRC by 6 July each year.
What Is Mileage Reimbursement Under HMRC Rules?
When an employee uses their own car for business trips, you can pay them back tax-free, up to the limits set by HMRC’s Approved Mileage Allowance Payment (AMAP) scheme:
- 45p per mile for the first 10,000 business miles in any tax year
- 25p per mile after that
These figures have not changed for 2026/27. They apply strictly to the employee’s own vehicle, not to anything the company owns.
If you pay less than the AMAP rate, the employee can claim Mileage Allowance Relief through self-assessment to recover the shortfall. Pay above the AMAP rate and the extra becomes taxable income, so there is no benefit to being generous beyond those thresholds.
To make the numbers concrete: a consultant driving 12,000 business miles a year in their own car collects £4,500 tax-free under AMAP (10,000 miles at 45p, plus 2,000 at 25p). No P11D. No BiK rate to calculate. No employer NICs on any of it.
The Comparison: Costs, Admin, and What Employees Actually Care About
What It Costs You
Company cars come with a fixed monthly commitment. Leasing or purchase, insurance, servicing, road tax, those bills land whether the employee drives 6,000 miles that year or 26,000. If someone goes on extended leave, moves to a remote role, or just turns out to travel less than anticipated, you are still paying. That predictability works in your favour when budgeting, but it becomes a problem when circumstances change.
Mileage reimbursement moves with actual usage. Lighter months cost less. Heavier months cost more. For most finance teams, that variability is the harder thing to live with, but it does mean you are not funding a car that sits in someone’s driveway three days a week.
The NIC position is worth spelling out clearly. Every company car generates 15% Class 1A NICs on its BiK value, paid annually by the employer. AMAP reimbursements within the approved rates carry no employer NICs at all. For a 10-person travelling team, that difference adds up.
There is also the fleet overhead that does not always make it into the comparison. Insurance renewals, MOT tracking, fuel cards, breakdown policies, accident administration, someone is managing all of that. In businesses without a dedicated fleet manager, it tends to land on whoever already has too much to do, and it absorbs more hours than it looks like from the outside.
The Admin Side
Running even a modest company car fleet is a continuous job. Service schedules, insurance renewals, replacement vehicles when something breaks down, P11D submissions every July. With 20+ cars, that is close to a part-time role in itself.
Mileage reimbursement cuts almost all of that. The one thing it does not cut is record-keeping. HMRC expects every claim to be backed by a log showing the date, where the employee went, why they were going there, and how many miles it was. When HMRC picks apart a reimbursement claim, it is nearly always because the records were vague or missing, not because someone used the wrong rate. Digital mileage apps have made this much easier, but employees have to use them consistently.
Tax Efficiency: The Quick Version
Criteria | Company Car | Mileage Reimbursement |
Predictable monthly cost | Yes | No |
Employer NICs | Yes, 15% on BiK | No |
Employee income tax | Yes, on BiK value | No, within AMAP |
Admin load | High (fleet + P11D) | Low to medium |
Best suited to | High-mileage / EV fleets | Variable or lower mileage |
What Your Employees Actually Think
Company cars still mean something, particularly in senior sales or client-facing roles. In those environments, the car is often just part of what the job comes with, and a newer vehicle the employee does not have to maintain or insure is a quality-of-life benefit, not just a number on a payslip.
That said, plenty of people would genuinely rather drive their own car. They choose the model. When they leave, the car leaves with them. There is no fleet policy dictating what they can and cannot pick. For younger employees especially, reimbursement often feels more like a fair deal than a company fleet scheme does.
The assumption to avoid is that everyone on your team feels the same way. Some people value the perk. Others find it more restrictive than it is worth. Asking before you build the policy takes five minutes and saves a lot of unnecessary friction later.
Tax Compliance: What Actually Catches Businesses Out
HMRC’s rules on both sides of this are straightforward enough. What causes problems is usually the detail.
Where company car reporting goes wrong:
Wrong BiK percentage on the P11D, this happens most often with hybrids, where the rate depends on electric range and can shift when a vehicle is replaced mid-year. Missing the 6 July P11D deadline. Failing to report the private fuel benefit separately when the company covers personal fuel costs, which triggers an additional taxable benefit.
Where mileage reimbursement claims fall apart:
Claims submitted without a business purpose recorded for each trip. Reimbursements above AMAP rates that have not been put through payroll as taxable income. Businesses applying AMAP rates to company-owned vehicles, which is not what those rates are for.
The basics that keep you clean:
- Record every business trip with date, destination, business reason, and distance
- For company cars, seriously consider low-emission or EV, the difference between 4% and 37% BiK is not marginal
- File P11D by 6 July, pay Class 1A NICs by 22 July (electronic)
- Brief your finance team on advisory fuel rates, HMRC updates them every quarter and using the wrong ones is a common slip
How to Actually Decide
The honest answer is that it depends on your mileage numbers, not on general principles.
For businesses where most employees drive under 10,000 business miles a year, AMAP reimbursement is almost always the lower-cost, lower-admin option. The employee uses their own car, claims tax-free at 45p a mile, and there is no P11D process to run.
For roles where employees regularly cover 15,000 miles or more a year, the AMAP arithmetic starts to look expensive. Ten thousand miles at 45p is £4,500 per person in reimbursements alone, before you factor in the miles above that threshold. At that volume, a leased EV at 4% BiK, with its lower fuel running costs, can come out cheaper for both you and the employee once you model it properly.
A rough threshold to work with: if average annual business mileage per employee sits above 10,000 miles and EVs are practical for your team’s routes, run the numbers on a company car scheme. Below that, AMAP reimbursement is usually the simpler and cheaper call.
One thing worth doing regardless: pull twelve months of actual mileage data before committing to anything. The result is often different from what the team assumes going in, usually in both directions.
Mistakes Worth Knowing About
- Picking high-CO₂ vehicles without telling employees what the BiK means for their take-home pay. A prestige diesel at 37% BiK can add more than £5,000 to a higher-rate taxpayer’s annual income tax bill. That is not a perk, it is an unexpected cost, and people tend to find out about it at the worst possible time, usually when they submit their first self-assessment after taking the car.
- Committing to a fleet before talking to a tax specialist. The way P11D values, Class 1A NICs, advisory fuel rates, and private fuel benefit interact is genuinely not obvious. A conversation before you sign leases is cheaper than unpicking errors afterwards.
- Treating mileage claims as self-certifying. Most employees are not trying to game it. But a log kept in a WhatsApp note or a rough spreadsheet does not hold up when HMRC reviews it. Set a process from the start, one that captures what they need, and stick to it.
- Designing the whole policy around tax efficiency without asking the people who have to live with it. A company car scheme nobody wanted is still a cost. Find out what your team actually values before you build the policy around assumptions.
What Is Changing and Why It Matters Now
EV BiK rates are low right now because the government deliberately made them attractive. But they are rising on a published schedule: 4% in 2026/27, then 5%, 7%, and 9% by 2029/30. None of those are high, but the window for locking in the lowest rates is not indefinite. If an EV fleet has been on the agenda, waiting does not help.
Hybrid and remote working has also changed the mileage picture in ways that are easy to underestimate. Employees who used to drive to client sites three times a week now sometimes handle those meetings by video call. Lower average mileage cuts both ways, it reduces reimbursement costs, but it also makes company car fleet costs harder to justify when vehicles are sitting idle more often.
Digital mileage tracking apps have made AMAP compliance genuinely less painful than it used to be. Auto-logged GPS trips, business or personal tagging, and automatic mileage totals have removed most of the friction that made reimbursement-based models annoying to administer.
For businesses with sustainability goals, an EV fleet is also a concrete action rather than a line in a policy document. Lower emissions, reduced fuel spend, and a position that sits on the right side of where climate regulations are heading.
What to Do With All of This
Neither option is the obvious right answer for every business. What determines the outcome is your actual mileage data, the practicality of EVs for your team’s routes, and whether your finance function has capacity to run a fleet or would genuinely rather not.
If you have been running a petrol or diesel fleet for several years without reviewing the BiK rates, it is worth doing that now. The gap between EVs and combustion vehicles has grown considerably, and it keeps growing.
If mileage reimbursement has been the default without anyone formally reviewing it in a while, check whether your higher-mileage employees would come out better under an EV scheme. Some of them probably would.
The only bad outcome is making the decision based on what seemed right a few years ago without checking whether the numbers still say the same thing.
Frequently Asked Questions
Is mileage reimbursement taxable for employees?
Not if you stay within HMRC's AMAP rates, 45p per mile for the first 10,000 business miles, 25p after that. Pay more than those rates and the excess gets treated as taxable income. Pay less and the employee can claim the difference back through self-assessment.
What is the most tax-efficient way to give employees a car benefit in 2026/27?
Electric vehicles at 4% BiK are the cheapest company car option from a tax perspective. Alternatively, if the employee owns their own car, AMAP reimbursement sidesteps BiK entirely, and you pay no employer NICs on it.
Does an electric company car actually reduce the employee's tax bill?
Considerably. A basic-rate taxpayer in a £40,000 EV pays around £320 in income tax on the benefit. Put someone in a high-emission car at the same list price and that figure can exceed £2,960. The car costs the same to provide. The employee pays nine times less in tax.
Can we use AMAP rates to reimburse fuel in a company-owned car?
No, AMAP is specifically for employees using their own personal vehicles. When the car belongs to the company, HMRC's advisory fuel rates are what you use to reimburse fuel costs.
What mileage records does HMRC actually want to see?
Date of travel, start and end point, the business purpose of the trip, and total miles. It also helps to keep a running annual total per employee so you know when they cross the 10,000-mile threshold and the rate drops from 45p to 25p. A mileage app that captures all of this automatically is the easiest way to stay audit-ready.
About The Author
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