What’s Happening with UK Car Tax? A Guide for Businesses

What’s Changing?

1. Electric Vehicles (EVs Will Pay Vehicle Excise Duty (VED))

Currently, fully electric vehicles (EVs) are exempt from VED, commonly known as road tax. However, from April 2025, EVs will be subject to the same taxation system as petrol and diesel cars.

• New EVs will pay the standard rate of VED (currently £180 per year, compared to £0 previously).
• Older EVs will also be taxed, with the rate depending on their original list price.

Understanding Benefit in Kind (BiK) Changes for Electric Vehicles

As the UK adapts its tax policies to include electric vehicles (EVs) in the standard VED framework, it’s important to note that the Benefit in Kind (BiK) rates for EVs will also be adjusted. Starting in 2025, the BiK rate for EVs will rise by 1% annually until 2027, at which point it will reach 5%. After this, the rate will increase by 2% each year until 2029, culminating at 9%.

This phased increase keeps BiK rates for EVs relatively low compared to those for petrol and diesel vehicles, reflecting the government’s support for cleaner transportation options. Businesses utilising EVs as company cars should anticipate these changes and consider their long-term vehicle and tax strategy accordingly.

2. First-Year Tax Bands Adjusted

New vehicles are currently taxed based on their CO2 emissions for the first year. The government has confirmed that these bands will be updated, meaning some cars may be taxed more heavily at the time of purchase. For example:

• A petrol car emitting 100g CO2/km currently pays around £190 in first-year tax, but this could rise to £220.
• A higher-emission diesel SUV emitting 160g CO2/km may see an increase from £585 to £650.

3. Expensive Car Surcharge Expands to EVs

Cars with a list price above £40,000 are subject to an additional VED charge, currently set at £390 per year for five years. Until now, EVs were exempt, but from April 2025, they will also be subject to this charge. For example:

• A Tesla Model Y (priced at £45,000) currently pays £0 road tax but will soon pay £180 plus the £390 surcharge, totalling £570 per year.
• A BMW i4 (priced at £52,000) will also move from £0 to £570 annually.

4. High-Emission Cars Could Face Taxes up to £5,000

Some high-emission petrol and diesel vehicles can face extremely high first-year VED charges. The first-year tax on new cars is based on CO2 emissions, and the highest tax band applies to vehicles emitting more than 255g CO2/km.

These vehicles can be charged up to £2,605 in the first year alone. Additionally, if the vehicle is priced above £40,000, it will also incur the £390 annual surcharge for five years, bringing the total extra tax over five years to nearly £5,000.

• Example: A high-performance petrol SUV like the Range Rover Sport P530 (CO2 emissions of 270g/km) could be taxed at £2,605 in year one, followed by £570 per year (standard VED + surcharge), bringing the five-year cost to over £5,000.
• Luxury sports cars with high emissions, such as a Lamborghini Urus (CO2 emissions of 325g/km), would fall into the highest tax bracket and be subject to similar high costs.
• The Porsche 911 Carrera S (CO2 emissions of 253g/km), with a list price above £40,000, will fall into the higher tax bracket. It will face a first-year VED charge of approximately £2,440, followed by £570 per year for five years due to the expensive car surcharge, bringing the total cost to around £5,290 over five years.
• Another example is the Ferrari 812 Superfast (CO2 emissions of 340g/km), which could face an initial VED charge of £2,605, followed by £570 per year in standard tax and surcharge, leading to a total tax burden of around £5,455 over five years.

How This Affects Businesses

Many businesses operate company cars or fleets, and these tax changes could have financial implications. Here’s what businesses should consider:

• Company Car Tax (Benefit-in-Kind – BiK) While EVs currently benefit from a lower BiK rate, this could increase in future budgets. Businesses should assess the long-term tax implications of choosing electric company cars.
• Fleet Costs With EVs losing their VED exemption, fleet operators will see an increase in annual running costs. Companies relying on EVs should factor these changes into their budgets.
• Leasing and Financing Decisions Businesses planning to purchase or lease vehicles should check how these tax changes affect long-term costs and incentives. Leasing agreements often incorporate road tax costs, so businesses should review their contracts to determine if additional charges will be passed on to them from 2025. Additionally, businesses leasing high-value EVs may see increased monthly lease costs due to the expensive car surcharge.

Key Takeaways for Business Owners