Over the past few years, there have been significant increases in the tax charges for directors and employees who have been provided with company cars. We are now at the point where this benefit is no longer as attractive as it once was, especially for petrol and diesel vehicles.
The exception to this is electric cars, where the tax treatment has remained highly favourable in recent years. These vehicles were initially attractive from a tax perspective but limited in terms of practicality and desirability. However, the landscape has changed dramatically — the tax position has stabilised at low, albeit increasing levels, and the range of high-performing electric vehicles has expanded significantly, making them a genuine option.
For the 2023/24 and 2024/25 tax years, fully electric cars are subject to a 2% benefit in kind (BIK) rate, calculated on the original list price (plus the cost of any accessories).
From 6 April 2025, this increased to 3%, followed by further increases to 4% in 2026/27, 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30.
Despite the incremental rises provided above, the BIK rate for electric vehicles remains substantially lower than that for petrol or diesel cars, which can attract rates of up to 37%, depending on CO₂ emissions. This means electric company cars continue to offer a highly tax-efficient option for directors and employees.
Should an electric car be taken as a company car or purchased privately?
Assuming the costs are the same regardless of whether supplied by the company or acquired personally, there is absolutely no doubt that this is a valuable benefit in kind and considerably cheaper to be supplied as a company car rather than acquired by the individual from taxed net pay. The tax position for the company is also very attractive in comparison to petrol or diesel cars due to advantageous tax treatment. These vehicles are also very attractive from a company car fuel perspective, as HM Revenue & Customs does not currently class electricity as a fuel. Therefore, no company car fuel benefit applies to a fully electric car.
In conclusion, if the employee wants a new electric car, it is likely that this will be more cost effective as a company car.
Leasing
OR
outright purchase
The most cost-effective method of acquisition by a business remains the outright purchase of a new and unused electric car, as this qualifies for 100% first-year capital allowances under current legislation, allowing the full cost to be deducted from taxable profits in the year of purchase. However, this approach presents practical challenges when calculating the appropriate salary sacrifice amount to leave the business in a neutral financial position. The uncertainty around future resale values and depreciation introduces an element of guesswork, particularly when the vehicle is provided to employees rather than business owners.
Under salary sacrifice arrangements, the employee gives up part of their gross salary in exchange for the use of the vehicle, which reduces both Income Tax and National Insurance liabilities. While electric vehicles attract a low benefit in kind rate of 3% in 2025/26, rising gradually to 9% by 2029, the business must still estimate the vehicle’s total cost over its useful life to ensure the salary sacrifice covers the expense. This can be complex when ownership is retained by the business.
For practical and financial certainty, leasing the vehicle may be preferable. Lease payments are generally tax-deductible, and for vehicles emitting 50g/km CO₂ or less, up to 100% of the lease rental cost can be offset against profits. Leasing also avoids the risks associated with depreciation and resale and provides predictable monthly costs.
Some scheme providers will provide a complete package including vehicle, maintenance, insurance, etc, for a single monthly premium. While they clearly charge for the service, it may be that the discounts they secure for bulk buying allow this charge to be absorbed, allowing for a cost-effective solution.
Other issues
The employer can provide a charging point at the employee’s home, without a taxable benefit arising, thus allowing the car to be charged overnight. The business can also install charging points at the workplace, again without taxable benefits arising, provided the facilities are available to all employees and not part of an optional remuneration arrangement. Please note that the provision of a charging point should not be linked to salary sacrifice.
However, there are practical points to consider. If an employee leaves the business shortly after installation, the company may be left with unrecovered costs. It is therefore advisable to include a clawback clause in the employee’s agreement, requiring repayment of installation costs if they leave within a defined period (e.g. 12–24 months). Similarly, if the employee takes extended leave (e.g. maternity, sabbatical) or pauses use of the vehicle, the business may continue to incur costs without the ability to reduce pay. Employers may wish to consider provisions for temporary return of the vehicle or pause in salary sacrifice.
These considerations should be addressed in a clear EV policy, ensuring both tax compliance and operational fairness.
Practicality
Clearly tax advantages are very desirable, but ultimately the vehicle must be fit for purpose. Therefore, you should first consider whether the vehicle is practical for intended use before choosing one. The key questions are likely to be:
- Is there somewhere to charge the vehicle?
- Is the range of the vehicle sufficient for intended purpose?
- Is the cost too high?
- Most importantly, is this the right car for me?
If the conclusion is that a new electric car ticks all the right boxes, then this should represent a considerable saving in comparison to a normally aspirated company car. It should also be cheaper to take this as a company car with salary sacrifice rather than financing for personal ownership.
Alternatively, if the conclusion is that a fully electric car is impractical, maybe a hybrid car is the solution. These are now less attractive from a tax perspective due to recent changes in the legislation. From April 2025, benefit in kind rates for plug-in hybrids have increased, and the Vehicle Excise Duty (VED) reliefs have been removed, meaning hybrids are now taxed more in line with petrol and diesel vehicles. The chargeable percentage applied to a hybrid car with CO2 emissions not exceeding 50 g/km still based on the range of the electric motor, with the greater the range resulting in a lower percentage applied to the original list price (plus the cost of extras), but the gap between hybrid and petrol/ diesel rates has narrowed and from 2029, all these hybrid cars are scheduled to be taxed us a percentage of 19% regardless of range. This may mean the balance sings towards personal ownership.
Hybrid cars do not however escape the company car fuel charge and therefore it is usually unattractive for the business to meet the cost of any private fuel in a company car that is not fully electric.
How can Menzies help?
Menzies can help you to understand the tax position and true cost from both business and individual perspectives enabling you to make informed decisions and the best option for you.
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