What Is Section 88 and How Does It Affect Company Car Tax?
Understand the tax principles for a company car benefit. Learn how its taxable value is determined and how specific circumstances can affect your overall liability.
When an employer provides a car to an employee that is available for their private use, it is treated as a taxable non-cash benefit. The private use of a company asset constitutes a form of income and must be taxed accordingly, including routine travel between an employee’s home and permanent workplace. The tax system for company cars accounts for the value of this perk to ensure that employees who receive such benefits contribute tax comparably to those who receive their entire compensation as cash salary.
Determining the Taxable Benefit
The foundation of company car tax is the calculation of the benefit’s cash equivalent, which determines the amount of income on which the employee will be taxed. This calculation begins with two primary components: the car’s list price and an “appropriate percentage” tied to its environmental impact.
The car’s “list price,” or P11D value, is the starting point for the calculation. This figure is the official registered price of the car when new, including VAT, delivery charges, and any optional accessories fitted before the vehicle is first made available to the employee. Even if an employer negotiates a discount or purchases the car second-hand, the tax is based on the original value.
The next step involves identifying the “appropriate percentage,” which is determined primarily by the car’s official CO2 emissions figure, measured in grams per kilometer (g/km). HMRC publishes tables of CO2 bands, each with a corresponding percentage. Generally, the higher the CO2 emissions, the higher the percentage, and for the 2025/26 tax year, these percentage rates are scheduled to increase.
Different rules apply depending on the car’s fuel type. The rate for fully electric vehicles is set at 3% for the 2025/26 tax year. For most other vehicles, the rates will increase by one percentage point compared to the previous year, up to a maximum of 37%. For hybrid cars with CO2 emissions between 1 and 50 g/km, the percentage is also influenced by their electric-only range—a greater electric-only range results in a lower percentage. Diesel cars that do not meet the Real Driving Emissions 2 (RDE2) standard are subject to a 4% supplement on their appropriate percentage, though this is capped at a maximum of 37%.
To calculate the annual taxable benefit, the car’s P11D value is multiplied by the appropriate percentage. For example, a petrol car with a P11D value of £30,000 and CO2 emissions that place it in the 25% band would have a taxable benefit of £7,500 for the year (£30,000 x 25%).
Adjustments and Reductions to the Benefit
After establishing the initial taxable benefit, certain circumstances can lead to a reduction in the final amount. These adjustments account for periods when the car is not available for use and for financial contributions made by the employee towards the car.
A significant reduction applies if the car is unavailable for private use for a continuous period of at least 30 days. The total taxable benefit is reduced proportionally for the number of days the car was unavailable. For instance, if a car was unavailable for 73 days of the tax year, the benefit charge would be reduced by 20% (73/365 days). This often applies when employment changes mid-year or during extended repairs.
The taxable benefit can also be reduced if the employee makes payments to the employer specifically for the private use of the car. Any such contribution is deducted directly from the calculated benefit amount, potentially reducing it to zero.
An employee can also make a capital contribution towards the cost of the car or any accessories, which reduces the P11D value used in the benefit calculation. This reduction is capped at a maximum of £5,000. For example, if an employee contributes £2,000 towards a car with a list price of £30,000, the benefit calculation will be based on a reduced value of £28,000.
Associated Tax Charges
A separate and additional tax charge, known as the car fuel benefit, arises if the employer provides fuel for the employee’s private journeys, including their commute. It is an all-or-nothing charge; if an employer pays for even a small amount of private fuel, the full benefit charge applies for that tax year.
The calculation for the fuel benefit uses a fixed figure set by HMRC annually, known as the car fuel benefit charge multiplier. For the 2025/26 tax year, this multiplier is £28,200. This fixed amount is multiplied by the same “appropriate percentage” that was used to calculate the main car benefit, which is based on the car’s CO2 emissions.
For example, if an employee drives a car with an appropriate percentage of 20%, the taxable fuel benefit for the year would be £5,640 (£28,200 x 20%). This amount is added to the employee’s taxable income, alongside the car benefit itself.
This fuel benefit charge can be completely avoided if the employee fully reimburses the employer for the cost of all fuel used for private travel. If full reimbursement is made, the fuel benefit charge is reduced to zero for that tax year.
Reporting and Paying the Tax
The process of reporting the company car benefit and paying the associated tax involves distinct responsibilities for both the employer and the employee.
Employers are required to report the cash equivalent of the car and any fuel benefit to HMRC for each employee who receives one. This is done using form P11D, and the deadline for submitting it to HMRC is July 6th following the end of the tax year. Alongside the P11D, employers must also submit a P11D(b) form, which summarizes the total benefits provided and calculates the Class 1A National Insurance Contributions the employer owes on these benefits.
For the employee, the tax due on the benefit is collected through the Pay As You Earn (PAYE) system. Once HMRC receives the benefit information, it will adjust the employee’s tax code. This adjustment reduces their tax-free personal allowance by the amount of the taxable benefit.
If an individual is required to file a Self Assessment tax return, they must also declare the company car benefit on their return. The information for this is taken from the copy of the P11D form that their employer must provide to them.