Opinion: Tax increases through the back ‘car’ door

By Ian Goodwin, employment tax partner at Forvis Mazars

The Budget has brought a real focus on cost for businesses given the rising National Minimum Wage and National Insurance rates announced.

However, for individual employees, the income tax and NIC rates stayed the same. Therefore, the Government considered individual employees’ tax bills to be unaffected.

This though is not a true reflection when you dig into the income tax treatment of vehicles, which is likely to have significant impact on net pay at a time when there is great anxiety about energy, mortgage, rent and other necessary costs outside of employment.

So, what could impact net pay from a company vehicle perspective?

Well, there are four main areas, meaning that most employees with a company car benefit will be impacted in some way or another (unless their vehicle is already at the maximum benefit-in-kind rate).

1.   Increases to the benefit-in-kind percentage rates for company cars through to April 2029.
2.   The re-categorisation of double cab pick-ups (DCPUs) as cars where they have a payload of over a tonne.
3.   The new emissions testing criteria for plug in hybrids.
4.   The potential removal of Employee Car Ownership Schemes (ECOS).

For the purposes of this article, we will focus on the first three, given Jon Messore’s recent article focussed on the topic of ECOS.

In each of the scenarios below, we will assume the employee receives a salary of £70,000 per year and is required to drive a company vehicle for business purposes, as well as needing to use it personally too.

Update 1 – BIK changes for company cars

• What is it?

In short, company cars could see their BIK percentage, which is based on their emissions, increase significantly between 2025/26 and 2029/30.

Therefore, choosing a company car for a specific lease period has become critical to managing overall net pay given the additional income tax that could be payable.

• What is the impact?

Again, it will be significant. For example:

- Wholly electric: A Tesla Model 3 with a list price of £40,000, will see the BIK value go from £800 in 2024/25 to £3,600 in 2029/30, increasing the income tax payable by over £1,000 from £320 to £1,440 respectively.

- Plug-in hybrid: A Mercedes C-Class Estate C 300 e AMG Line Premium Plus 9G, with an electric mileage range of 68 miles and list price of £60,000 will see a BIK of £4,800 in 2024/25 go up to £11,400 by 2029/30 increasing income tax payable at 40% from £1,920 to £4,560.

- Traditional petrol vehicle: A Volkswagen Golf Estate 1.5 TSI R-Line 150PS, with 129g/km and a list price of £32,000, will see a BIK of £9,600 in 2024/25 go up to £10,560 in 2029/30, increasing the income tax payable from £3,840 to £4,224.

What is interesting here is that the larger changes in BIK value are happening at the electric and plug-in hybrid company vehicles. This may mean employees start to rethink their vehicle choice, particularly if the list price of traditional petrol or diesel vehicles is less.

This could therefore interact with organisation’s environmental approaches, as well as the Government’s net zero objectives.

• What do I need to do next?

Employers should be sharing the information with their employees to ensure that they are fully informed when choosing vehicles via an organisation’s company car scheme. Additionally, employers should be re-assessing their fleet and the choices that are available.

Individual employees who drive extensively for work will need to establish if they are better off with a personal vehicle rather than company car, especially where they may receive a car allowance and 45p for the first 10,000 business miles, even for a fully electric car.

Update 2 – The re-categorisation of DCPUs

• What is it?

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 much higher for cars than for vans.

However, 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 (as a van) until the earlier of their disposal, lease expiry, or April 2029.

• What is the impact?

Significant. Lets assume the individual employee has a Ford Ranger and changes to a new Ford Ranger of equivalent value (a £50,000 list price) on 6 April 2025, meaning the new rules apply from that date.

	2024/25	2025/26
List Price	£50,000	£50,000
Emissions	Over 160 g/km	Over 160 g/km
Benefit in Kind %	Flat rate - £3,960	37%
Benefit in Kind Value	£3,960	£18,500
Tax to pay on vehicle BIK (40%)	£1,584	£7,400
Fuel Benefit In Kind Value	Flat rate - £757	£28,200 x 37% = £10,434
Tax on Fuel BIK	£303	£4,174
Total Tax	£1,887	£11,574
Difference	£9,687 extra tax to pay

This is equivalent to an extra tax bill of £807 per month. How will the individual employee afford to pay this tax?

• What do I need to do next?

If your employees need a new or updated DCPU, make sure you order one before 6 April 2025 and use this vehicle through to 2029.otherwise, your employees will need to be comfortable with paying a significant amount of extra tax and you as the employer will need to be mindful of the additional NIC costs too.

Other options should therefore be explored, including whether an actual van can be used instead. However, HMRC continue to investigate whether vehicles are vans for BIK purposes so this is also an area to tread carefully into.

Update 3 – The new emissions testing criteria for plug-in hybrids

• What is it?

The current Euro 6e emissions standards have been replaced by stricter Euro 6e-bis tests. https://www.fleetnews.co.uk/news/phevs-face-stricter-emissions-test 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.

• What is the impact?

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% BIK), would, under the new standards see its emissions increase to 96g/km, moving the BIK rate to 24% (25% in 25/26), meaning a significant increased in income tax and Class 1A NIC becoming payable by the employee and employer.

Further, an 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 and 32% by 2029/30).

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

Tax Year	BIK Value	Income Tax (40%)	Employer Class 1A NIC
2024/25	£4,000	£1,600	£552
2025/26	£12,500	£5,000	£1,875
2026/27	£12,500	£5,000	£1,875
2027/28	£15,000	£6,000	£2,250
2028/29	£15,500	£6,200	£2,325
2029/30	£16,000	£6,400	£2,400

This could move certain plug-in 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 with what value is reported to HMRC as the BIK.

A separate consideration here is the added complexity in establishing BIK values. Given the Government push to get employers to payroll benefits rather than report them on forms P11D, this could lead to errors in amounts being reported via payroll.

This should be a further reason for the government not to rush to eliminate 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.

• What do I need to do next?

Building on the changes to BIK values mentioned earlier in the article, employees need to be mindful of this when choosing their vehicle otherwise they could get a very nasty tax surprise, impacting on their net take home pay and giving employers additional reward considerations, as well as higher NIC costs.

Summary

There is a lot of change and added cost coming the way of employees and employers. Taking advice and being aware of these changes will leave businesses better prepared to manage them and be in a position to mitigate the impact on employee reward overall.

It is clear though that tax rises have come through the back “car” door and are unlikely to help the Government achieve its growth plans, especially when looking at the wider context of increases in employer NIC and other tax increases.