HMRC Confirms Company Car Tax Overhaul Taking Effect From April 2027

HM Revenue and Customs has confirmed a major shake-up in how tax on company cars, vans and fuel benefits will be collected, moving away from paper-based annual reporting towards real-time payroll deductions. The changes, due to take effect from 6 April 2027, form part of a wider modernisation drive aimed at making the tax system more accurate and easier for both employers and employees to navigate.

Under the new rules, employers will be required to report Benefit-in-Kind (BiK) payments through payroll software and Real Time Information, rather than relying on the traditional end-of-year process. This marks a significant departure from the current system, under which most benefits in kind are reported annually via form P11D, in line with Regulations 85 to 87 of the Income Tax (Pay As You Earn) Regulations 2003. Real-time reporting is currently only available on a voluntary basis, under Chapter 3A of Part 3 of the Income Tax Regulations 2003.

What’s changing and when

The first phase of mandatory payrolling, beginning in the 2027 financial year, will apply to company cars, car fuel, vans, van fuel and employer-provided medical benefits. A second phase will follow from April 2028, extending mandatory payrolling to most remaining BiK rates, while arrangements for employer-provided loans and accommodation are expected to be confirmed separately at a later date.

To help employers adjust, HMRC has confirmed it will apply a temporary easement from penalties during the first year of the new system, meaning businesses that make genuine, non-deliberate errors while adapting will not automatically face sanctions. Employers will nonetheless need to update their payroll systems in advance to ensure benefits in kind can be reported correctly through Real Time Information once the changes come into force.

Why HMRC says the change is needed

According to HMRC, the reforms are intended to improve transparency around tax liabilities and ensure tax is calculated and collected more accurately and promptly. “This reform supports a more efficient and responsive tax system by reducing reliance on retrospective adjustments and complex processes,” the department said. “This improves clarity for taxpayers and helps businesses comply more easily with their obligations. It contributes to the Government’s wider objective of creating a simpler, more digital, and more effective tax system that keeps pace with modern working and payroll practices.” The change is expected to reduce errors and largely remove the need for end-of-year tax adjustments, with employees instead seeing BiK tax deducted gradually throughout the year rather than through a later correction to their tax code.

The reform sits within HMRC’s broader Making Tax Digital programme, which aims to shift the UK’s tax system towards a more digital, real-time model for both employers and taxpayers.

How company car tax is currently calculated

Under the existing system, employees pay tax on a company car if they use it privately, including for commuting, with the amount owed depending on the car’s list price and the type of fuel it uses. The taxable value of the car can be reduced if it is only available part-time, if the employee contributes towards its cost, or if it produces low CO2 emissions. Separately, drivers are taxed on personal journeys if their employer covers the cost of fuel for those trips.

Company car tax rates from 6 April 2026