Company car tax increases: What do rising vehicle costs mean for employers?

Company cars have always needed careful tax planning, but the position is becoming more complex.

For several years, electric company cars were an easy headline answer because the benefit-in-kind rates were very low. That advantage has not disappeared, but it is narrowing. For businesses, the issue is not just whether employees pay more tax. Higher company car charges can affect employer National Insurance, payroll administration, fleet budgets, staff expectations, lease decisions and long-term remuneration planning.

Company car tax costs are rising across several areas. Electric vehicles remain tax-efficient compared with many petrol and diesel cars, but the gap is reducing. Plug-in hybrids need particular care because BIK treatment, emissions, electric range and future mileage charges may all affect the real cost. Employers should model the full term of any lease or purchase, not just the cost in the first tax year.

Common mistakesA common mistake is looking only at the monthly lease cost. The real cost of a company car involves the list price, CO2 emissions, electric range where relevant, benefit-in-kind percentage, employer Class 1A National Insurance, Vehicle Excise Duty, insurance, charging or fuel, maintenance and the way the benefit is reported through payroll.

Another mistake is assuming that an electric vehicle is still close to tax-free. It may still be efficient, but the rates are rising and from April 2028 a mileage-based charge is expected to apply to electric and plug-in hybrid cars.

When to get helpYou should take advice before ordering or renewing company cars, introducing a salary sacrifice scheme, changing car allowance policies, providing private fuel, or choosing between electric, hybrid, petrol and diesel vehicles. Small differences in list price, emissions, electric range or lease timing can change the tax cost for several years.

Why company car tax matters to the business, not just the employeeCompany car tax is often seen as an employee issue because the driver pays income tax on the benefit. That is only part of the picture.

When a company car is available for private use, the employee is taxed on a benefit-in-kind. The value of that benefit is usually based on the car’s list price, including taxable accessories, multiplied by the appropriate percentage for that car. That percentage is mainly driven by CO2 emissions, and for some hybrid vehicles, electric range.

The employee pays income tax on the benefit. The employer pays Class 1A National Insurance on the taxable benefit value. That means any increase in the taxable value can create two consequences at the same time: a higher tax charge for the employee and a higher employer cost for the business.

For owner-managed businesses, this matters because company cars are often part of remuneration, recruitment, retention and director reward planning. If the tax cost rises too far, a company car may no longer feel like the right benefit for the employee or the right cost for the employer.

The electric car advantage is still there, but it is reducingElectric company cars can still be tax-efficient compared with many petrol and diesel cars. However, the low BIK rates that made electric vehicles particularly attractive are increasing.

That does not mean electric company cars are no longer worth considering. In many cases, they will still compare favourably, especially against higher-emission vehicles with higher list prices. But directors should avoid making decisions based on old assumptions.

The key point is timing. A car ordered now may remain in use for three or four years. A decision that looks tax-efficient in the first year of a lease may look different by the final year.

Businesses should therefore model the full contract term, not just the current tax year. This is especially important where employees are choosing vehicles through a company scheme, salary sacrifice arrangement or cash allowance alternative.

Plug-in hybrids need closer reviewPlug-in hybrid electric vehicles sit in a more complicated position. For some employees, PHEVs have offered a balance between lower emissions, electric driving for shorter journeys and the flexibility of petrol or diesel for longer trips. From a tax perspective, however, they are becoming harder to assess.

The taxable position depends on the vehicle’s CO2 emissions and, where relevant, its electric range. Future changes mean that some plug-in hybrids may become less attractive than expected, particularly where the vehicle is being selected on a multi-year lease.

The wider planning point is simple: do not assume all plug-in hybrids are tax-efficient. Some may still work well, but others may become less attractive once the full tax cost, lease term and future changes are considered.

Employer National Insurance can be overlookedWhen company car tax rises, the employee impact is usually the first thing people notice. But employer Class 1A National Insurance is also important.

The higher the taxable benefit, the higher the employer’s Class 1A National Insurance cost. For one vehicle, that may not feel material. Across a fleet, or across a group of directors and senior employees, the cost can become more noticeable.

This should be built into budgeting. It should also be considered when comparing a company car with a car allowance, salary increase, salary sacrifice arrangement or private ownership with business mileage reimbursement.

The answer will not be the same for every business or every employee. The right option depends on tax rate, mileage, vehicle choice, funding method, employment package and how the car is used.

Vehicle tax and future mileage charges add another layerVehicle Excise Duty also needs to be included in the decision. Electric, zero and low-emission cars are now within the VED regime. From the second year onwards, many electric cars pay the standard annual rate. Higher-value cars may also fall within the Expensive Car Supplement rules, although the threshold for zero-emission cars increased from April 2026.

For businesses, this does not replace the BIK calculation, but it does add to the total cost of running vehicles.

There is also a further change on the horizon. From April 2028, electric and plug-in hybrid cars are expected to come within a new mileage-based electric Vehicle Excise Duty regime. The proposed charge is 3p per mile for fully electric cars and 1.5p per mile for plug-in hybrids.

For a low-mileage employee, that may not be a major cost. For sales teams, regional managers, directors or employees covering high annual mileage, it needs to be factored into the whole-life cost.

Payroll reporting is changing tooThe tax cost is not the only issue. Reporting is also changing. From April 2027, most benefits in kind are due to be reported through payroll in real time. That includes company cars in many cases. This means employers will need accurate benefit data available during the tax year, rather than treating the P11D process as a year-end exercise.

This matters because company cars often change during the year. Employees may join, leave, swap vehicles, add accessories, change fuel arrangements or move between benefit packages. Payroll teams will need timely information to avoid incorrect deductions and employee confusion.

For employees, the change may also affect take-home pay visibility. Some employees who are used to tax being collected later through their tax code may see tax on benefits collected more directly through payroll.

Communication will be important. Employees need to understand that a change in take-home pay may be the result of real-time benefit taxation, not necessarily a payroll error.

Leased company cars need an accounting review as wellTax is only part of the picture. Where company vehicles are leased, businesses should also consider the accounting impact.

For accounting periods commencing on or after 1 January 2026, changes to FRS 102 mean many operating leases will need to be recognised on the balance sheet. That can affect how vehicle leases appear in the accounts, the data that needs to be collected and the way finance teams monitor lease commitments.

This is particularly relevant where a business is reviewing company cars at the same time as wider lease reporting changes. You can read more in our related article: FRS 102 Operating Lease Reform: Impact on UK SMEs from 2026.

What businesses should review nowBusinesses that provide company cars should not wait until the next renewal point to review the position.

A practical review should include:

1. Current company cars
List each vehicle, including list price, CO2 emissions, fuel type, electric range, lease end date, driver, private use position and whether private fuel is provided.

2. Vehicle replacement dates
Identify which cars are due for renewal before April 2027 and April 2028. Vehicles ordered now may run across several tax changes.

3. Whole-life cost
Compare lease cost, BIK cost, employer National Insurance, VED, insurance, maintenance, charging or fuel, and expected mileage.

4. Employee impact
Review how much tax employees will pay and whether the benefit remains attractive. A company car that is no longer valued by the employee may not be the best use of company money.

5. Alternatives
Compare company cars with car allowances, salary sacrifice, private ownership and business mileage reimbursement. Each option has different tax, cashflow and administrative consequences.

6. Payroll readiness
Make sure HR, payroll, finance and any external payroll provider can handle real-time benefit reporting from April 2027.

7. Policy clarity
Update company car policies so employees understand eligibility, vehicle choice, private use, charging, fuel reimbursement, mileage records and tax implications.

This review may also sit alongside a wider employee benefits review. For wider context, see our related article: Tax free benefits for employees

Private fuel should be challengedPrivate fuel is one area that should always be reviewed carefully. ​For some employees, private fuel benefit can create a tax charge that is higher than the value of the fuel actually received. This is particularly common where private mileage is relatively low.

If private fuel is provided, businesses should check whether it still makes commercial and tax sense. In many cases, it may be better for employees to pay for private fuel themselves or reimburse the employer for private mileage, provided the records are accurate and the arrangement is properly managed.

The decision is no longer just electric or notThe company car decision used to be simpler. For many businesses, the question was whether to move from petrol or diesel to electric. That is still part of the conversation, but it is no longer enough.

The better question is: what is the right vehicle and reward structure for the business, the employee and the next three to five years?

For some, that may still be a fully electric company car. For others, it may be a carefully selected PHEV, a cash allowance, a private car with mileage reimbursement, or a different fleet policy altogether. What matters is that the decision is based on current rules, future rates and the full cost of ownership.

Planning aheadCompany cars can still be a valuable part of a reward package, but they need more active management than before.

The businesses most likely to avoid unexpected costs are those that review their current arrangements early, model future tax years before placing orders, and explain the changes clearly to employees. For business owners, the key is not to remove company cars automatically. It is to make sure the company car policy still supports the commercial goals of the business.

A company car should work as a benefit, a recruitment tool and a practical business asset. If the tax cost starts to outweigh the value, it is time to review the structure before the next renewal forces the decision.

How can we help?

Oldfield can help you review the tax and commercial impact of your company car arrangements. Whether you are renewing vehicles, considering electric or hybrid options, reviewing employee benefits or preparing for payroll changes, we can help you understand the numbers before you commit.

Frequently Asked Questions

Q: Are electric company cars still tax-efficient?
A: In many cases, yes. Electric company cars still usually have lower BIK rates than petrol or diesel cars. However, the rates are increasing and from April 2028 a mileage-based charge is expected to apply to electric cars. They remain worth considering, but the full contract term should be modelled before making a decision.

Q: Are plug-in hybrids still a good company car option?
A: They can be, but the answer depends heavily on the vehicle. CO2 emissions, electric range, lease timing and future tax changes all matter. Some PHEVs may remain attractive, while others may be less efficient than expected.

Q: Does higher company car tax affect the employer?
A: Yes. The employee pays income tax on the benefit, but the employer pays Class 1A National Insurance on the taxable benefit value. If the taxable value rises, the employer cost will also rise.

Q: Should we offer a car allowance instead?
A: A car allowance may be simpler, but it is not automatically better. It can increase payroll cost and may not deliver the same value to the employee. The comparison should include tax, National Insurance, business mileage, insurance, employee expectations and practical business needs.

Q: What should employers do before ordering new company cars?
A: Employers should review the full cost across the expected ownership or lease period. That means looking at BIK rates, employer National Insurance, VED, future mileage charges, fuel or charging costs, employee tax impact and payroll reporting requirements.

Please note: This article is for general information purposes only and was correct as at the time of writing (16/06/26) and does not constitute financial advice. Tax rules and legislation are subject to change, and their application depends on your individual circumstances. We recommend seeking advice from a suitably qualified tax adviser. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.