While the changes will not take effect until the 2028/29 tax year, they represent a significant shift in the way plug-in hybrid vehicles (PHEVs) are taxed. At the same time, the Government continues to maintain a strong tax incentive for fully electric vehicles (EVs).
How does company car tax work?
Where an employer provides a car that is available for private use, the employee pays Benefit-in-Kind (BIK) tax on the value of that benefit. The amount payable depends on:
- The P11D value of the vehicle
- The employee’s income tax rate
- The appropriate percentage, which is mainly determined by the car’s CO₂ emissions.
This percentage is set by the Government and is the key factor that determines how tax-efficient a company car is.
Plug-in hybrids will face a major tax change from April 2028
The most significant change announced in the Budget affects plug-in hybrid vehicles (PHEVs).
Currently, PHEVs with low CO₂ emissions fall into several BIK bands depending on their electric-only driving range. In some cases, vehicles with longer electric ranges attract BIK rates of around 6%, making them an attractive option for company car drivers.
However, from 6th April 2028, the rules will change - all vehicles emitting 1–50g/km of CO₂, which includes most plug-in hybrids, will be placed into a single BIK band of 18%.
This will rise slightly again to 19% in 2029/30.
In practice, this removes the existing tax advantage for hybrids with longer electric ranges and brings their tax treatment closer to petrol and diesel vehicles.
For some drivers currently benefiting from BIK rates as low as 6%, this could represent a significant increase in tax payable once the new rules take effect.
Electric vehicles will remain the most tax-efficient option
The Government has confirmed that BIK rates for zero-emission vehicles will continue to rise gradually, but they will still remain significantly lower than those for petrol, diesel and hybrid cars. For example:
- 3% BIK in 2025/26
- 4% in 2026/27
- 5% in 2027/28
- 7% in 2028/29
- 9% in 2029/30.
This staged increase provides long-term certainty while still maintaining a clear tax advantage for electric vehicles compared with internal combustion engine vehicles.
Transitional support for some plug-in hybrid drivers
Recognising the potential impact of these changes, the Government has announced a temporary easement for some plug-in hybrid company cars.
This measure applies retrospectively from 1st January 2025 to 5th April 2028, helping to mitigate increases in BIK liabilities for certain vehicles affected by new emissions standards. Transitional arrangements for some PHEVs may continue until April 2031.
This should help avoid sudden tax changes for drivers already using plug-in hybrids.
Other tax changes affecting electric and hybrid drivers
The Budget also included other announcements affecting electric and hybrid vehicles more broadly.
One notable change is the introduction of a new mileage-based road tax charge for EVs and plug-in hybrids from April 2028. Under the proposals:
- Electric vehicles will pay around 3p per mile
- Plug-in hybrids will pay around 1.5p per mile
The policy is intended to help replace declining fuel duty revenues as more drivers switch to electric vehicles. Although this represents an additional cost, electric vehicles may still be cheaper to run overall compared with petrol or diesel vehicles depending on usage and charging costs.
What do the BIK tax changes mean for employers and company car drivers?
Although the changes are a few years away, they may influence company car decisions made today. In particular:
- Fully electric vehicles will remain the most tax-efficient option
- Plug-in hybrids will lose much of their BIK advantage from 2028
- Company car schemes may gradually shift towards fully electric fleets,
Employers offering salary sacrifice or company car arrangements may wish to review their policies, purchases and leases over the next few years to ensure they remain cost-effective for both the business and employees.
If you need advice about electric and hybrid company cars, talk to LWA
Company car taxation can become complicated, particularly where salary sacrifice schemes, electric vehicles and hybrid technology are involved.
If you operate a company car scheme, we can help you:
- Review the tax efficiency of different vehicle options
- Understand the BIK implications for employees
- Plan ahead for the changes taking effect from 2028.
If you would like advice on company car taxation or employee benefits, please contact the LWA Corporate Tax team on 0161 905 1801 in our Manchester office, or 01925 830 830 in Warrington, or you can email your query to mail@lwaltd.com.