Planning for tax changes to company cars during their lifecycle
As businesses plan their fleet strategies, recent changes announced in the Autumn Budget are set to impact the tax costs associated with company cars.
With benefit-in-kind (BiK) rates now confirmed up to 2029/30, businesses need to consider how these changes will affect their costs over a vehicle’s lifetime.
What is changing?
The good news is that businesses entering into new leases or purchases can now predict employment tax charges for the next five years.
The bad news is that these charges will increase across the board.
- Zero-emission cars – BiK rates for pure electric vehicles will rise steadily by one per cent per year from 2025/26 to 2027/28, reaching seven per cent in 2028/29 and nine per cent in 2029/30.
- Other cars – For petrol and diesel cars, the rates will rise more modestly by one per cent per year, with a maximum of 38 per cent in 2028/29 and 39 per cent in 2029/30.
The hybrid conundrum
For hybrids, the picture is more complex.
Until 2027/28, the BiK rate for hybrids with 1–50g/km emissions depends on their electric range.
Cars with a longer electric range are taxed at lower rates, with the most efficient hybrids currently at just five per cent.
However, from 2028/29, all hybrids in this range will be taxed at 18 per cent (rising to 19 per cent in 2029/30) regardless of their electric range.
This could result in a tax hike for the most efficient hybrids, making them less attractive as a long-term choice.
Businesses considering hybrid vehicles should weigh up the costs carefully before committing.
Pros and cons of electric cars
Moving to pure electric vehicles has its advantages, though rising BIK rates and other changes make them less lucrative than they once were. For example:
- The vehicle excise duty (VED) exemption for electric cars will end in April 2025, with these vehicles being taxed at the lowest standard rate.
- Despite the rising BiK rates, electric cars remain competitive compared to petrol, diesel, and hybrid options.
- Electric vehicles benefit from salary sacrifice exemptions, meaning businesses and employees can still enjoy tax savings under optional remuneration arrangements (OpRA).
The Budget also extended the temporary first-year allowances for businesses buying zero-emission vehicles and charging points to 31 March 2026 (5 April for income tax purposes).
Electric company cars can also boost a business’s green credentials and appeal to employees, though practicality concerns, such as charging infrastructure and range limitations, remain key considerations.
Are vans a cost-effective alternative?
Company vans offer a simpler approach to tax. Instead of a percentage-based BiK charge, vans are taxed at a flat rate (currently £3,960 a year).
This amount will rise in line with inflation from April 2025 but is likely to remain a lower-cost option compared to cars.
However, businesses must ensure the vehicle meets the criteria for a van rather than a car.
From April 2025, double-cab pickups with a payload of one tonne or more will be taxed as cars for BiK purposes.
Transitional rules mean that pickups leased or purchased before April 2025 can still be treated as vans until 2029, but businesses need to act quickly to take advantage of this.
Need help managing these changes? Contact us today for advice on managing your fleet’s tax efficiency and choosing the right vehicles for your business.
