Tax rates to increase on company cars and other vehicles

Given that Labour said they would not raise taxes for “working people”, decisions must now be made on how to mitigate costs.

Below are two important taxation changes to company vehicles.

1. Double Cab Pick Up (DCPUs) tax changes

Starting from April 2025, the UK tax legislation for DCPUs will undergo significant changes in how they are treated for Benefit in Kind (BIK) purposes.

Key changes

• Classification as cars: From April 2025, DCPUs with a payload weight of over a tonne will be classified as cars for BIK tax purposes, rather than vans as they currently are. This change affects how the BIK tax is calculated, which is typically higher for cars than for vans.
• BIK rates: Currently, DCPUs classified as vans attract a lower BIK charge. For example, the BIK rate for a van is a fixed amount, which is significantly lower than the rate for cars, which is based on the vehicle’s original manufacturer’s list price and CO2 emissions.
• Transitional arrangements: There will be transitional arrangements for vehicles purchased, leased, or ordered before April 2025. These vehicles will continue to be treated under the old rules until the earlier of their disposal, lease expiry, or April 2029.

An example

Current regime (Before April 2025)

• Van BIK rate: £3,960
• Van fuel BIK rate: £757
• Total assessable income: £3,960 + £757 = £4,717
• Tax cost for higher rate taxpayer (40%): £1,887

New regime (From April 2025)

Assume a DCPU with a list price of £40,000 (inc VAT) and high CO2 emissions (37% rate).

• Car BIK rate: £40,000 x 37% = £14,800
• Car fuel BIK rate: £28,200 (fixed fuel multiplier) x 37% = £10,434
• Total assessable income: £14,800 + £10,434 = £25,234
• Tax cost for higher Rate taxpayer (40%): £10,093

As you can see, the annual tax cost for a higher rate taxpayer increases significantly under the new regime by £8,206. To cover this extra tax, the employee would need to earn at least another £14,148 in gross income before tax (even more if they currently claim Child Benefit or would go over the £100,000 income threshold and have their personal allowance restricted or “free” childcare removed).

From an employer’s perspective, they too will have to pay much more in employer National Insurance Contributions (NIC). The employer will now pay £3,785 in Class 1A NIC compared to £651 in Class 1A NIC, an increase of £3,134. Therefore, where an employer has 10 DCPUs, the additional annual cost for the employer will be £31,340.

How to mitigate the impact of DCPUs tax changes

Individuals and employers need to act now. There are transitional arrangements which will defer the new tax treatment and vehicle categorisation until April 2029. Therefore, if looking to change and update your DCPU in 2025 or 2026, accelerate this process and order one on or before 5 April 2025. HMRC have updated their guidance on this change.

Alongside this, businesses will need to think about any “pool” DCPUs they have. Where the new rules take effect, it will be necessary to assess whether the previous DCPU that was a pool van and may have benefitted from not attracting a tax charge can still benefit from not attracting a tax charge when re-categorised as a pool car.

2. Increases to company car BIKs rates due to stricter emissions testing regulations for hybrid vehicles

An increase on company car BIKs was in play before the Autumn Budget but important for employees and businesses to understand given it will increase income tax, impacting on net reward and also increase employer NIC bills.

In short, BIK rates for company car will increase from 2025/26 onwards, including those that are fully electric. Here are the tax increases on BIK rates for company cars from 2023 to 2030.

A 4% surcharge applies to diesel vehicles not meeting the RDE2 standard.

Stricter emissions testing

One of the lesser-known changes impacting on BIK rates will be the Stricter emissions testing introduced from 1 January 2025 for plug in hybrids.

The current Euro 6e emissions standards will be replaced by stricter Euro 6e-bis tests. From January 1 2025, all newly launched vehicles will need to comply and from 31 December 2025, all newly purchased vehicles will need to comply.  Previously, emission tests simulated 800km (497 miles) of driving. Under Euro 6e-bis, this will increase to 2,200km (1,367 miles), a distance designed to better capture how PHEVs perform in real life.

This could mean, by way of example, the BMW X1 xDrive25e, which has previously been tested as having CO2 emissions of around 45g/km (an 8% Benefit-in-Kind), would, under the new standards see its emissions increase to 96g/km, moving the BIK to 24% (25% in 25/26), meaning a significant amount more income tax and Class 1A NIC will become payable by the employee and employer.

Further, additional impact is likely to occur in 2027, when Euro 6e-bis-FCM testing, is planned to be introduced. It will test vehicles over 2,647 miles. Under these conditions, the same BMW X1 would likely see emissions rise to around 122g/km, creating further increases in BIK (a 30% BIK charge in 2027/28).

Assuming a list price of £50,000, this would take the BIK as follows:

This will move hybrid vehicles out of the previously more advantageous BIK rates for vehicles with emissions of less than 50 g/km. It could also interact negatively with the Optional Remuneration rules (OpRA) where the vehicle emissions go beyond 75g/km. This means that those operating salary sacrifice arrangements will need to take due care of the value reported to HMRC as the BIK.

Again, there is some restriction here to which vehicles these updated emission rates (and by extension BIK rates) will apply. As it stands, only cars bought new (from the dates mentioned above) will be affected by the updated emissions standards; there are no plans to backdate the bandings for existing company car users. Therefore, existing company car drivers won’t see their tax bands updated. This, however, may be something to watch out for future updates on.

A separate consideration here is the added complexity of establishing BIK values. Given the Government's push to payroll benefits rather than report on forms P11D, this is likely to lead to incorrect amounts being reported – another reason to maintain P11D reporting until more is known of how payrolling of benefits will operate from the date the Government wishes to mandate it, from April 2026.

Get in touch with our employment tax experts

If you have any concerns regarding taxation changes and increases on company cars, please do not hesitate to get in touch with our tax specialists.

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