Changes in Tax Rates for Electric Cars Through Company Schemes: What You Need to Know
As of April 2025, significant changes are set to impact the taxation of electric cars, particularly those acquired through company schemes. These adjustments are part of a broader effort to align tax policies with the increasing adoption of electric vehicles (EVs) and to address the financial implications of their growing popularity.
Road Tax (Vehicle Excise Duty) for Electric Cars
Historically, electric cars have been exempt from road tax, also known as Vehicle Excise Duty (VED), to encourage their adoption. However, from 1 April 2025, this exemption will come to an end. Electric cars registered after this date will incur a nominal first-year rate of £10, followed by the standard rate of £195 per year from the second year onwards.
For new electric car buyers, this means that while the initial year’s tax is minimal, subsequent years will see them paying the same standard rate as petrol, diesel, and hybrid vehicles. Additionally, if the list price of the electric car exceeds £40,000, an expensive car supplement of £425 per year will apply from the second to the sixth year of the car’s life on the road.
Company Car Tax (Benefit-in-Kind)
The Benefit-in-Kind (BIK) tax rates for company cars are also undergoing changes. As of April 2025, the BIK rate for electric cars will increase from 2 percent to 3 percent, with further annual increases of 1 percent until 2027/28, reaching 5 percent by then.
This rise in BIK rates is part of a broader strategy to gradually align the tax treatment of electric cars with that of other vehicles. Despite these increases, electric cars will still be taxed at lower rates compared to petrol and diesel cars. For instance, petrol and diesel cars can have BIK rates ranging from 23 percent to 37 percent, depending on their CO2 emissions, with an additional 4 percent surcharge for diesel cars that do not meet specific emission standards.
Impact on Hybrid Vehicles
Hybrid vehicles, including plug-in hybrids (PHEVs), will also see changes in their taxation. The BIK rates for these vehicles will continue to rise, albeit at a slower pace than for electric cars. By 2028/29, the BIK rates for PHEVs will significantly increase, regardless of their electric-only range. This change will affect cars delivered from 6 April 2025 onwards, particularly those on 3-year contracts that extend past 6 April 2028.
Practical Considerations for Employers and Employees
These changes have several practical implications for both employers and employees
Budgeting
Companies and employees need to factor in the increased costs associated with the new tax rates. This includes both the VED and the higher BIK rates.
Vehicle Selection
The tax implications may influence the choice of company cars. While electric cars remain a cost-effective option despite the increases, the overall tax burden needs careful consideration.
Contract Planning
For vehicles on 3-year contracts, it is crucial to plan ahead, especially for PHEVs, given the significant tax rate increases anticipated in the coming years.
Conclusion
The upcoming tax changes reflect the government’s effort to balance the encouragement of sustainable transportation with the need to maintain public finances. As electric cars become more mainstream, these adjustments aim to ensure a more equitable tax system.
For clients of Cutts and Co Accountancy, it is essential to stay informed about these changes to make informed decisions regarding company car schemes. By understanding the new tax rates and their implications, businesses can better manage their budgets and optimise their vehicle policies to align with both financial and environmental goals.
If you have any questions or need further guidance on how these changes might affect your company, do not hesitate to contact us.
