As the UK moves towards cleaner transport and its net-zero targets, the tax treatment of electric vehicles (EVs) continues to evolve. For businesses, fleet operators and company car users, it is important to understand how current incentives work and how upcoming changes may affect costs.
Impact on Directors and Employees
The Benefit in Kind (BIK) rate for fully electric company cars will remain at 3% for the 2025/26 tax year, increasing to 4% for 2026/27. This is still significantly lower than the rates for petrol and diesel vehicles, which can go up to 37%.
EVs offered through salary sacrifice schemes remain highly tax-efficient, as many employees benefit from reduced income tax and National Insurance contributions compared to the cost of personal leasing. Employers also see savings through reduced National Insurance contributions.
Reimburse employees for company car business travel
If the mileage rate you pay is no higher than the advisory fuel rates for the engine size and fuel type of the company car, there will be no taxable profit and no Class 1A National Insurance to pay.
From 1 December 2025 to 28 February 2026, the mileage rates for business travel are:
- EV – 7p (home charger) and 14p (public charger)
- Hybrid (Petrol) – Engine size (cc)- up to 1400 – 12p, 1401 to -2000 – 14p, and 22p for car over 2000cc
The advisory fuel rates are worked out from the fuel prices in these tables. These rates change quarterly and can be found on Gov.Uk’s Advisory Fuel Rates page: https://www.gov.uk/guidance/advisory-fuel-rates
Previous rates can be used for up to 1 month after new rates are published.
Capital Allowances
Buying a brand-new and unused zero-emission (EV) car can qualify for a 100% First-Year Allowance (FYA), allowing them to deduct the full vehicle cost from taxable profits in the year of purchase, offering immediate tax relief.
This 100% allowance has been extended and is available for qualifying expenditure incurred until 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax.
Second-hand EVs do not qualify for FYA. Instead, they must use the “main rate” writing down allowance, which is currently set at 18%, reducing to 14% from April 2026. This still gives tax relief, but it is spread over several years.
VAT Claim
VAT generally cannot be reclaimed on the purchase of a company car unless it is used for taxi self-drive hire, driving instruction, purchased as stock-in-trade by a motor manufacturer or dealer, or used 100% for business purposes with no availability for private use.
While leasing qualifying cars, you can normally reclaim 50% of the VAT. The 50% block is to cover any possible private use of the car.
What’s New: Electric Vehicle Excise Duty (eVED)
From April 2028, electric and plug-in hybrid vehicles are expected to be subject to a new mileage-based charge, known as Electric Vehicle Excise Duty (eVED), alongside existing road tax. Current proposals include:
- Battery electric vehicles: 3p per mile
- Plug-in hybrid vehicles: 1.5p per mile
This reflects a broader move toward road-usage taxation, with the aim of ensuring that all drivers contribute to road maintenance, regardless of vehicle type. As a result, this change will increase running costs, particularly for higher-mileage drivers.
Key Insights
The Autumn Budget 2025 confirms continued government support for EVs, including financial incentives, tax benefits, and expanded charging infrastructure. However, this is coupled with a gradual shift toward road-usage taxation from 2028, with mileage-based charges expected to increase running costs.
Despite these changes, electric vehicles remain a highly attractive option for businesses and company car drivers, offering low BIK (benefit in kind) rates, salary sacrifice savings, and generous capital allowances until 2027, all providing significant tax and cost advantages over petrol and diesel vehicles.
With ongoing HMRC changes, especially the expected gradual increase in BIK rates over the coming years, it’s a good idea to review your options and plan ahead.
Thinking about leasing or buying a car? Get in touch with us, and we’ll help you navigate the tax implications to ensure you make the best choice for your business.
