Jack Fowler FCCA explains and compares company car tax rates between electric, hybrid, and petrol vehicles.
How beneficial are electric vehicles and vans for your business, from a tax perspective?
By comparison, how punitive is it to now own and operate combustion engine cars through your business?
Whether you’re an owner-manager pondering the most tax-efficient way to reward your staff, or even an employee weighing up the pros and cons of your compensation package, it’s crucial to understand the nuances of company car tax, in particular benefit-in-kind and how the capital allowances scheme is applied to these assets.
In this blog post we’ll demystify these regulations and concepts to explain how company cars are taxed, and the implications of owning various different types of vehicles and vans from a tax perspective. Needless to say zero carbon dioxide emission vehicles tend to be the most tax advantageous but there are a multitude of subtle considerations that need to be considered carefully regarding other cars.
If you need your employees to travel as part of their work, you’ll likely want to reward them well for what they do, but at the same time try to achieve this by investing in your business in a financially efficient manner. Be sure then to read on, for this post can provide you with the essentials as to company car benefits to help steer you in the right direction.
What is benefit-in-kind car tax?
HM Revenue & Customs applies benefit-in-kind tax, also known as company car tax, where a vehicle is made available for private use by an employee. Benefit-in-kind (BIK) is also referred to as a non-monetary benefit, or perk on top of their salary, resulting in the tax being applied to the benefit your employee receives from this.
The exact benefit they receive is calculated as a percentage (or rate) of the car’s P11D value, in comparison to if they simply received an equivalent amount in pay before income tax.
BIK rates have been adjusted recently with the aim of encouraging employers, and the drivers of company cars, to shift away from petrol and diesel vehicles to fully electric cars and/or plug-in hybrids.
What are capital allowances for business vehicles?
Capital allowances are a tax mechanism whereby you can obtain relief against the capital expenditure, say of purchasing a company car, by deducting it from your annual taxable income.
If you purchase a new company car, it’s likely you won’t be able to deduct the total sum of the car from your profits in the tax year in which you purchased it. Instead the tax deduction is spread across the timeframe of your ownership. This means every tax year you obtain a proportion of the cost of your company car as a deduction against your profits.
The amount of the deduction reduces with each passing tax year. Therefore it can take many years (even beyond your ownership of the car in question) to write off the vehicle in full against your profits. Click here for more details on the capital allowance rates.
How do I calculate BIK car tax
Every car is categorised through a BIK percentage banding. This is calculated based on the CO2 emissions of the vehicle in question and its P11D value. The P11D value is the list price, which includes extras and VAT, but excludes the first year registration fee and vehicle tax.
To calculate your BIK, or company car tax, you multiply the P11D value of the vehicle by the BIK percentage banding. Then, you multiply that by the tax band of the employee in question, with the prevailing tax rates being 20%, 40%, and 45%, to then provide you with the annual tax amount.
Do you pay BIK on electric vehicles?
In the 2024/25 tax year, zero CO2 emission vehicles, such as electric cars, have a BIK rate of 2% of their list price. Then compare this to petrol and diesel vehicles, where it’s likely to be within the 25% – 37% BIK rate range. Obviously from this tax perspective, zero emission electric vehicles are likely to be the preferable financial option if you’re considering making a purchase.
BIK rates for petrol and diesel hybrids
For hybrid vehicles that have CO2 emissions between 1-50g/km, the BIK rates can be somewhat higher than zero emission electric vehicles, but are likely to still be more favourable compared to those for petrol or diesel cars.
The rate depends on the pure electric range of the car, and it increases the lower the battery range on the vehicle is. The below table sets this out in more detail:
| Range | BIK rate |
| 14% | |
| 30 – 39 miles | 12% |
| 40 – 69 miles | 8% |
| 70 – 129 miles | 5% |
| 130+ miles | 2% |
Vans
To complicate matters, van benefits do not work under the same mechanism as cars. Rates for vans aren’t applied to list prices, but are instead set at a specific, chargeable amount. So, no matter what type of van you have for the 2024/25 tax year the amount is £3,960 and this then rises to £4,020 in 2025/26.
An advantage of vans is that HMRC don’t tend to consider the provision of a van to an employee as a BIK so long as the vehicle in question is used for travel from home to work, and for work purposes only.
The reason for this is a van is unlikely to be a particularly fitting replacement for a car for the usual purposes in day-to-day life. Historically HMRC have included various vehicles in their definition of a van. Double cab pick-ups with the correct payload (being at least 1 tonne) were classified as such for BIK as an example.
Some recent wins in tribunals, the big one coming against Coca Cola, means this definition is based on the purpose the vehicle has been primarily constructed for. If this is not the conveyance of goods, it’s highly likely that HMRC will classify the vehicle as a car.
Double cabs pick-ups
The tribunal wins mentioned above further narrowed the definition of a van. This meant certain vehicles that you may describe as a van, no longer meet the criteria. However, this didn’t directly impact on double cab pick-ups. Unfortunately this was addressed in the Autumn Budget 2024 meaning from April 2025, double cab pick-ups will no longer be classified as vans for tax purposes.
This change is expected to be expensive for employees and directors who benefit from the van benefit charge. This charge, previously around £4,000, may rise significantly as it will now be based on the list price of the pick-up, determined by its CO2 emissions, which are typically high for this type of vehicle.
Additionally, employees who previously used their pick-ups solely for commuting and work purposes, and thus did not incur any benefit charges, will now face additional tax liabilities for using their vehicles.
Transitional arrangements
The upcoming change is expected to significantly affect both employers and employees who utilise double cab pick-ups. Consequently, HMRC has introduced transitional arrangements for employers who have invested in these vehicles.
If these double cabs were purchased, leased, or ordered before April 2025, they can continue to benefit from the previous tax treatment. However, this transition will only remain valid until the earliest of the following:
- The vehicle is disposed of
- The lease expires
- 5 April 2029
Company car tax bands
The table below highlights current and future BIK car tax bands based on the CO2 emissions of vehicles. The rates are applicable only to vehicles registered after 6 April, 2021.
| CO2 (g/km) | Electric range | 2024/25 % |
2025/26 % |
2026/27 % |
2027/28 % |
2028/29 % |
2029/30 % |
| 0 | N/A | 2 | 3 | 4 | 5 | 7 | 9 |
| 1 – 50 | >130 | 2 | 3 | 4 | 5 | 18 | 19 |
| 1 – 50 | 70 – 129 | 5 | 6 | 7 | 8 | 18 | 19 |
| 1 – 50 | 40 – 69 | 8 | 9 | 10 | 11 | 18 | 19 |
| 1 – 50 | 30 – 39 | 12 | 13 | 14 | 15 | 18 | 19 |
| 1 – 50 | 14 | 15 | 16 | 17 | 18 | 19 | |
| 51 – 54 | 15 | 16 | 17 | 18 | 19 | 20 | |
| 55 – 59 | 16 | 17 | 18 | 19 | 20 | 21 | |
| 60 – 64 | 17 | 18 | 19 | 20 | 21 | 22 | |
| 65 – 69 | 18 | 19 | 20 | 21 | 22 | 23 | |
| 70 – 74 | 19 | 120 | 21 | 21 | 22 | 23 | |
| 75 – 79 | 20 | 21 | 21 | 21 | 22 | 23 | |
| 80 – 84 | 21 | 22 | 22 | 22 | 23 | 24 | |
| 85 – 89 | 22 | 23 | 23 | 23 | 24 | 25 | |
| 90 – 94 | 23 | 24 | 24 | 24 | 25 | 26 | |
| 95 – 99 | 24 | 25 | 25 | 25 | 26 | 27 | |
| 100 – 104 | 25 | 26 | 26 | 26 | 27 | 28 | |
| 105 – 109 | 26 | 27 | 27 | 27 | 28 | 29 | |
| 110 – 114 | 27 | 28 | 28 | 28 | 29 | 30 | |
| 115 – 119 | 28 | 29 | 29 | 29 | 30 | 31 | |
| 120 – 124 | 29 | 30 | 30 | 30 | 31 | 32 | |
| 125 – 129 | 30 | 31 | 31 | 31 | 32 | 33 | |
| 130 – 134 | 31 | 32 | 32 | 32 | 33 | 34 | |
| 135 – 139 | 32 | 33 | 33 | 33 | 34 | 35 | |
| 140 – 144 | 33 | 34 | 34 | 34 | 35 | 36 | |
| 145 – 149 | 34 | 35 | 35 | 35 | 36 | 37 | |
| 150 – 154 | 35 | 36 | 36 | 36 | 37 | 38 | |
| 155 – 159 | 36 | 37 | 37 | 37 | 38 | 39 | |
| 160 – 164 | 37 | 37 | 37 | 37 | 38 | 39 | |
| 165 – 169 | 37 | 37 | 37 | 37 | 38 | 39 | |
| 170+ | 37 | 37 | 37 | 37 | 38 | 39 |
Capital allowances and business deductions
It’s worthwhile noting that the earlier mentioned changes to double cabs will impact the capital allowances that businesses can reclaim.
From April 2025, the capital allowance treatment will sync with that of cars, namely being dependant on the CO2 emissions per the table below.
|
CO2 emission of g/km |
Capital allowance |
|
0 |
100% |
|
1 – 50 |
18% pa |
|
> 50 |
6% pa |
The content of this post was created on 28/03/2025.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
