Changes to the benefit-in-kind taxation of drivers and the taxation of electric cars in the UK have been announced, which will impact UK fleets.
It follows the Autumn Statement from the third Prime Minister/Chancellor combo in the space of three months, such has been the febrile nature of UK politics.
Following the economic turmoil of the 45-day Liz Truss premiership, the UK’s government has some significant shortfalls in its finances.
We had all been warned that the UK populace would need to pay more taxes, so it came as no real surprise when the Chancellor announced company car benefit-in-kind tax rates would be increased on electric cars.
Reaction ranged from the outraged to the resigned.
More importantly, fleet managers got foresight of future benefit-in-kind rates for drivers, particularly around electric cars (EVs), which are driving the fleet sector in the UK.
More than anything else, this will help fleets with planning more confidently around three- and four-year fleet cycles.
For the record, from April 2025, benefit-in-kind (BiK) rates for electric and ultra-low emission cars emitting less than 75g CO2 per kilometer will increase by 1% annually, up to a maximum of just 5% for electric cars and 22% for ultra-low emission cars in 2027/28.
Rates for all other bands will increase by 1% (up to a maximum of 37%) in 2025/26, and will then be frozen for the next two years.
Benefit-in-kind taxation increases for zero emission cars
- 2023/24: 2
- 2024/25: 2
- 2025/26: 3
- 2026/27: 4
- 2027/28: 5
Ashley Barnett, head of fleet consultancy at Lex Autolease, had this to say on the increases:
“The publication of company car rates beyond 2025 reaffirms the government’s commitment towards a greener future and gives decision makers the clarity they need to accelerate their transition towards EVs.
"Fleet replacements typically operate in four-year cycles and today’s announcement paves the way for future purchasing decisions – giving them the confidence they need to commit to a long-term sustainability plan. With longer lead times from manufacturers delaying the delivery of many vehicles, having clarity beyond 2025 is a major boost for future electric fleet decision making.”
These benign changes to benefit-in-kind tax also helped maintain the appeal of salary sacrifice, which has become the fastest growing form of finance in the fleet sector - up 33% year-on-year to 35,751 cars, according to the British Vehicle Rental and Leasing Association’s quarterly BVRLA Leasing Outlook report.
Salary sacrifice allows employees to access electric vehicles at a lower cost than if they were to lease the cars themselves personally, thanks to taxation and National Insurance breaks. Driver benefit-in-kind is still payable for the employee, but on EVs this remains very low, despite the announced changes.
The point was picked up by Andy Bruce, CEO of fleet management and leasing company Fleet Alliance, who said: “We can continue to encourage as many drivers as possible to switch to zero emission motoring, whether they are company car drivers or employees benefiting from a progressive electric car salary sacrifice scheme.” He added that salary sacrifice was important for employers who wished to drive forward their Environmental, Social and Governance (ESG) agenda.
Increase in Vehicle Excise Duty
Less welcomed by the industry was the rise in so-called road tax - or Vehicle Excise Duty (VED). This is an annual tax that goes into government coffers, some of which is used to improve the UK’s road system. In 2022-23, VED is expected to raise £7.2 billion. So far electric cars have been exempt from VED charges, but this will change from 2025 when EVs will pay road tax on the same scale as petrol or diesel (ICE) models.
Paul Hollick, chair of the Association of Fleet Professionals, summed it up best: “The VED equalization with ICE – something that will apply to the vast majority of EVs from 2025/26 - is disappointing but perhaps not unexpected. It does feel a little as though the government has given with one hand and taken some back with the other.”
There’s further adverse news for fleets with the announcement that EVs will also be subject to the VED expensive car supplement - currently £355 a year for a period of five years for cars costing in excess of £40,000 levied in addition to VED.
With EVs often costing more than £40,000, the government has seen an opportune moment to increase its tax take; but it’s also a sign from the government, I suspect, that it wants to see OEMs keep EVs affordable as we head towards the 2030 deadline when new ICE vehicles will be banned from sale.
What does this mean for fleets? The application of VED from April 2025 will further increase EV whole-life costs, but the comparison between electric cars and internal combustion engine cars should not be significantly changed: EVs will remain the fleet choice.
From Incentive to Equalization
Governments across Europe have been incentivizing the uptake of electric vehicles as part of a move to reduce global emissions and to clean up the quality of urban air breathed by its inhabitants.
That difficult balancing act between incentivization and lost taxation recovery is a tricky one: risk stalling the EV revolution too early against the requirement to fill the UK’s £50m budget gap.
In Norway, the most advanced EV country in Europe with an aggressive 2025 deadline for all vehicles to be either EV or hydrogen, the unwinding of incentives has already begun now that 64% of the new car market is EV.
In the UK, the market is far less advanced at 11.6% for the same period as Norway. Nevertheless, the direction of travel is clearly towards zero emission.
Has the UK government moved too far too fast? I suspect not. It looks to have struck the right balance. Incentives remain in place - and even if they remain less generous, they don’t appear to be severe enough to divert the zero emission direction of travel, which is where fleets are leading the way.