Budget: Fuel duty frozen and hybrids hit by new BIK tax rates

Fuel duty has been frozen and new benefit-in-kind (BIK) tax rates will continue to incentivise the uptake of fully electric company cars, the Chancellor has announced.

However, company car drivers of plug-in hybrid electric vehicles (PHEVs) face a hike in their BIK from 2028/29 of up to 13 percentage points, with zero-emission mileage being ditched as a differentiator.

The last time BIK tax tables were updated was two years’ ago, giving fleets and their drivers visibility of company car tax rates until April 2028. 

It meant fleets have had to order vehicles without knowing how much tax their drivers would incur in fourth year of their contract.

The Government has now published company car tax tables for an additional two years, up to 2029/30.

The appropriate percentage used to calculate an individual’s company car tax for zero-emission vehicles will increase for 2028/29 and 2029/30 by two percentage points per year taking them to 7% and 9% respectively.

However, in a move which will significantly impact drivers of plug-in hybrid company cars, the appropriate percentage rates for vehicles which produce 1g to 50g CO2 per kilometre and are also capable of operating on electric power within a certain range will be amended. 

Vehicles with CO2 emissions of 1g to 50g per kilometre will have appropriate percentages of 18% in 2028/29 and 19% 2029/30.

For a PHEV capable of up to 69 miles zero-emission driving, that will mean a seven percentage point year-on-year increase in BIK.

The appropriate percentages for all other emission bands will increase by one percentage point per year in 2028/29 and 2029/30. 

This will be to a maximum appropriate percentage of 38% for 2028/29 and 39% for 2029/30. 

Double cab pick-ups to be treated as company cars

After the previous Government performed a spectacular U-turn after announcing it was initially going to treat double cab pick-ups as company cars, the new Chancellor has now changed the vehicle's definition for tax purposes. 

Hidden in the small print of the Budget, the Government says it will treat double cab pick-up vehicles with a payload of one tonne or more as cars.

From April 2025, for corporation tax, and from April 6, 2025 for, income tax, it says that double cab pick-ups will be treated as cars for the purposes of capital allowances, BIK and some deductions from business profits.

Fleets were warned last year that they could be “sleepwalking into a significant tax liability” with HMRC investigating vehicle classification for BIK tax purposes.    

The most common double cab pick-up in the UK is the Ford Ranger with a list price of circa £60,000 and CO2 emissions of over 200g/km putting it squarely in the 37% tax bracket meaning a BIK of around £22,200 a year, leading to employee tax of £8,880 a year for a 40% taxpayer or £13,320 a year at 60% tax or £1,110 a month.

Delivering her first Budget, Rachel Reeves also announced she will increase the differential between fully electric and other vehicles in the first rates of Vehicle Excise Duty (VED) beginning in April 2025.

Zero emission cars will pay the lowest first year rate at £10 until 2029/30, while rates for cars emitting 1-50g/km of CO2, including hybrid vehicles, will increase to £110 for 2025/26. 

Rates for cars emitting 51-75g/km of CO2, including hybrid vehicles, will increase to £130 for 2025/26.

All other rates for cars emitting 76g/km of CO2 and above will double from their current level for 2025/26.

There is potentially further good news on the horizon, with the Government saying it recognised the “disproportionate impact” of the current VED Expensive Car Supplement threshold for those purchasing zero emission cars, currently £40,000, and will consider raising the threshold for zero emission cars at a future fiscal event, to make it easier to buy electric cars

Reeves did, however, commit to extending 100% First Year Allowances for electric cars and charge points for a further year.

The Government says that the transition to electric vehicles (EVs) is crucial to decarbonising transport and will support growth and productivity across the UK. 

It has committed to phasing out new cars that rely solely on internal combustion engines by 2030, with all new cars and vans sold in the UK to be zero emission by 2035. 

The Government says it will build on this by investing more than £200 million in 2025/26 to accelerate EV charge point rollout, including funding to support local authorities to install on-street charge points across England. 

It will also provide £120m in 2025/26 to support the purchase of new electric vans via the plug-in vehicle grant.  

Fuel duty frozen

With the Labour Government pledging not to raise income tax, VAT or employee national insurance, fleets had been braced for a hike in fuel duty.

The previous Chancellor, Jeremy Hunt, announced a 12-month extension to the temporary 5p fuel duty cut for petrol and diesel as part of the Spring Budget in March. This was in addition to cancelling the planned inflation increase for 2024/25.

The temporary cut was first introduced in March 2022 to combat high fuel prices after global supply chain issues following the pandemic, as well as Russia’s invasion of Ukraine.

Petrol and diesel duty rates were set to rise by 5p in March 2025 plus retail price index (RPI) inflation (in April 2025) and by RPI inflation every year thereafter.

Reeves says increasing fuel duty next year would be the “wrong choice” for working people. Instead, she told MPs she will freeze fuel duty next year and will maintain the existing 5p cut for another year, too. 

RAC head of policy, Simon Williams, said: “Drivers will breathe an enormous sigh of relief after all the speculation that the 5p cut would be scrapped at the same time as pushing duty up beyond the long-term rate of 57.95p.”

The Government says it will also facilitate competition in the road fuels market, improve transparency and empower drivers to find the cheapest fuel prices by accepting the Competition and Markets Authority’s recommendations to implement Fuel Finder, an open data scheme for fuel prices and a market monitoring function by the end of 2025. 

While fuel price reactions are inevitably uncertain and sensitive to wider global factors, by increasing transparency and encouraging competition between forecourts, scenario modelling by the Government suggests pump prices could reduce by 1-6p per litre as a result of these measures, helping to ensure that drivers get a fair deal for fuel across the UK.

National insurance increase for employers

Reeves said that employers' national insurance contributions (NICs) will rise from 13.8% to 15%.

In addition, the threshold at which businesses start paying NI on a workers' earnings will be lowered from £9,100 to £5,000.

Employers currently pay NI at 13.8% on a worker’s earnings above £9,100 a year or £175 a week. The 1.2 percentage point increase and lowering of the threshold is expected to be worth an additional £25bn a year by the end of 2029/30. 

Reeves also says she is increasing employment allowance to help smaller businesses. The employment allowance will increase from £5,000 to £10,500, which the Chancellor says will mean 865,000 employers will not pay any NI at all next year.

Treasury estimates suggest that that one million will pay the same or less as they did previously. 

In addition, Reeves says that there will be no extension of the freeze in income tax and NI thresholds for employees. From 2028-29, personal tax thresholds will be uprated in line with inflation, she says.

Prior to the Budget, Alphabet said that any plans to change the benefit thresholds could wreak havoc with salary sacrifice scheme providers if the numbers do not add up for vehicle lessees.  

Salary sacrifice, also known as salary exchange, has been integral in helping employees to lease an EV by agreeing to give up a proportion of their salary.

Gerry Keaney, chief executive of the British Vehicle Rental and Leasing Association (BVRLA), said: “This was a complex budget at a difficult time.

“The increase to employers’ national insurance will have a substantial impact on businesses and their customers. The full scale of its impact will only be seen in time.

“For our sector, the Chancellor has left many challenges unresolved. As penalties to stay in ICE vehicles ramp up in line with the ZEV mandate, more needs to be done. The barriers relating to the rental sector, charging infrastructure, consumer education and the used EV market, all need close attention.

“The Budget did bring some green shoots of positivity, suggesting that the Government is taking the UK’s transition to cleaner, greener vehicles seriously.

“The confirmation that the fair EV company car tax regime will be continued at least to 2030 is a positive step, supporting a vital contributor to the transition and a bright spot of success up to now. Extending the Plug-in Van Grant provides the sector with a much-needed boost.”

Pothole funding increased

The Budget commits the Government to providing almost a 50% increase on 2024-25 funding for local roads maintenance. 

This, it says, will go further than its commitment to fix an additional one million potholes across England each year, investing almost £1.6bn to maintain and renew roads, an increase of £500m on 2024-25.

Williams said: “This is positive news for drivers as it should enable cash-strapped local authorities to begin the process of improving the quality of their roads. 

“But it’s vital councils don’t just use the money to fill potholes as this is unlikely to deliver the long-term benefit drivers so badly want to see. 

“We believe greater use of preventative maintenance is essential. 

“Surface dressing roads at regular intervals is a proven, cost-effective way of ensuring potholes don’t appear in the first place, along with resurfacing the worst affected roads.”

Automotive investment

The Budget confirms the Industrial Strategy’s commitment to target interventions to drive growth where the UK has, or could develop, a comparative advantage. 

Included in funding pledges is more than £2bn over five years to support the automotive sector, including the zero emissions vehicle (ZEV) manufacturing sector and supply chain.

The Treasury says this provides the long-term certainty that industry need to invest in advanced, greener technologies. 

Inflation and growth forecasts

Reeves also revealed inflation predictions from the Office for Budget Responsibility (OBR), with CPI inflation averaging 2.5% this year, 2.6% in 2025, 2.3% in 2026, 2.1% in 2027, 2.1% in 2028 and 2.0% in 2029.

Reeves says that the OBR has published a detailed assessment of Labour's policies for the next decade.

Listing its forecasts, she says real GDP growth will be 1.1% in 2024, 2% in 2025, 1.8% in 2026, 1.5% in 2027, 1.5% in 2028, and 1.6% in 2029.

“This Budget will permanently increase the supply capacity of the economy, boosting long-term growth,” she told the Commons.

Wage increases for workers

Prior to delivering the Budget, Reeves had announced that the national living wage will increase from £11.44 to £12.21 an hour from April 2025. The 6.7% increase will be worth £1,400 a year for an eligible full-time worker.

The national minimum wage for 18 to 20-year-olds will also rise from £8.60 to £10.00 an hour – the largest increase in the rate on record. 

This £1.40 increase will mean full-time younger workers eligible for the rate will see their pay boosted by £2,500 next year. 

Reeves said: “This Government promised a genuine living wage for working people. This pay boost for millions of workers is a significant step towards delivering on that promise.”

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