As the UK government intensifies its efforts to promote environmental sustainability and fund a massive program of road repairs, significant changes to company car taxation are forthcoming. These adjustments aim to encourage the adoption of low-emission vehicles and impact both employers and employees. This guide provides a detailed overview of the impending tax increases, effective from April 2025, and their implications for company car users.
Understanding Benefit-in-Kind (BIK) Taxation
Benefit-in-Kind (BIK) tax applies to employees who receive perks or benefits from their employment, including the provision of a company car. The BIK tax rate is determined by the vehicle’s carbon dioxide (CO₂) emissions, with higher-emission vehicles attracting higher tax rates. This structure incentivises the selection of environmentally friendly vehicles.
Scheduled Increases in BIK Rates
The government has announced a series of incremental increases in BIK rates for company cars, particularly affecting electric vehicles (EVs):
- 2025/26 Tax Year: EVs will attract a BIK rate of 3%.
- 2026/27 Tax Year: The rate for EVs will rise to 4%.
- 2027/28 Tax Year: A further increase will set the BIK rate at 5%.
These changes represent a gradual shift from the current 2% rate, reflecting the government’s strategy to balance revenue generation with the promotion of zero-emission vehicles.[i]
Impact on Petrol and Diesel Vehicles
Petrol and diesel company cars will continue to be taxed at higher BIK rates, ranging from 25% to 37%, depending on their CO₂ emissions. This disparity underscores the financial advantages of opting for low-emission or electric vehicles over traditional internal combustion engine models.[ii]
Vehicle Excise Duty (VED) Adjustments
In addition to BIK tax changes, Vehicle Excise Duty (VED), commonly known as road tax, will also undergo significant revisions starting April 2025:
- Standard Rate: All cars registered after 1 April 2017, including petrol, diesel, hybrid, and electric vehicles, will be subject to a standard VED rate of £195 per year. This change eliminates the previous exemption for electric vehicles and the £10 discount for hybrids.[iii]
- Expensive Car Supplement: Vehicles with a list price exceeding £40,000 will incur an additional annual charge of £425 for five years, applicable to all fuel types.
Financial Implications for Diesel Vehicles
Drivers of diesel vehicles could face substantial tax increases, with potential hikes of up to £15,000. These increases result from changes to BIK rates and VED adjustments, making diesel vehicles less financially attractive.[iv]
Strategic Considerations for Employers and Employees
Given the forthcoming tax landscape, both employers and employees should reassess their company car policies:
- Transition to EVs: Despite the gradual increase in BIK rates for EVs, they remain the most tax-efficient option compared to higher rates for petrol and diesel vehicles.
- Cost-Benefit Analysis: Evaluate the total cost of ownership, including purchase price, tax liabilities, and running costs, to make informed decisions about vehicle selection.
- Policy Updates: Employers may need to revise company car policies to align with new tax regulations and encourage the adoption of low-emission vehicles.
The impending changes to company car taxation in the UK reflect a broader commitment to environmental objectives. By understanding these adjustments and strategically selecting vehicles, both employers and employees can navigate the evolving tax landscape effectively while contributing to sustainability goals.
[i] https://www.dsburge.co.uk/tax/company-car-tax-guide/
[iii] https://www.cinch.co.uk/news/car-tax-april-2025
[iv] https://www.gbnews.com/lifestyle/cars/rachel-reeves-april-car-tax-changes-diesel-drivers
