Company Cars in 2025/26: Should You Go Electric?
As tax rules around company cars continue to evolve, many directors and employees are reconsidering whether now is the right time to switch to an electric vehicle (EV). With Benefit in Kind (BiK) rates for petrol and diesel cars rising — and electric car incentives still in place — there’s a growing financial case for going green.
But is an EV the best option for your business in 2025/26? This post breaks down the tax treatment of company cars this year, how EVs compare to traditional fuel vehicles, and what planning points to consider before making the move.
How Are Company Cars Taxed?
When an employee or director is provided with a company car that is available for personal use, HMRC treats this as a Benefit in Kind (BiK). The taxable value of that benefit is added to your income and taxed at your marginal rate.
The BiK value is calculated using:
-
List price of the car (not purchase price)
-
CO2 emissions and fuel type
-
The car’s availability during the year
This value is then multiplied by your income tax rate (usually 20%, 40% or 45%).
BiK Rates for 2025/26
HMRC continues to reward low-emission vehicles and penalise higher-emission models.
Here are the typical BiK rates for 2025/26:
| Vehicle Type | CO2 Emissions | BiK % (2025/26) |
|---|---|---|
| Fully electric (EV) | 0 g/km | 2% |
| Plug-in hybrid | <50 g/km | 5–14% |
| Petrol/diesel (Euro 6d) | 75–129 g/km | 23–29%+ |
| High-emission petrol/diesel | 130+ g/km | 30–37% |
These percentages apply to the car’s list price, not market value, and don’t reflect discounts or second-hand prices.
Example: EV vs Petrol Car in 2025/26
Scenario:
A director has the choice of:
- Electric car (list price: £45,000)
- Diesel car (CO2: 130 g/km, list price: £35,000)
BiK Calculation:
Electric car:
- £45,000 × 2% = £900
- Tax at 40% = £360
Diesel car:
- £35,000 × 30% = £10,500
- Tax at 40% = £4,200
Annual tax saving: £3,840
Even though the EV is more expensive, the director pays substantially less tax each year. The company also saves on Class 1A NICs (see below).
Employer Costs: Class 1A National Insurance
In addition to the employee tax charge, the company must pay Class 1A NICs on the taxable benefit value, currently at a rate of 13.8%.
Using the examples above:
- Electric car NICs: £900 × 13.8% = £124.20
- Diesel car NICs: £10,500 × 13.8% = £1,449
Another major saving for the business.
EVs and Corporation Tax Relief
Electric vehicles may also qualify for favourable capital allowances, which can reduce the company’s corporation tax bill.
100% First-Year Allowance (FYA):
Companies can claim 100% capital allowances on new, fully electric cars if:
- The vehicle is new (not second-hand)
- It is a car (not a van or other asset)
- It emits 0g/km CO2
This means:
- If your company buys an EV for £40,000, it can deduct the full £40,000 from profits in the year of purchase
This effectively reduces corporation tax by up to 25% of the car’s cost.
Note: From April 2025, the 31 March 2025 deadline for the super-deduction has passed — but the standard FYA remains for EVs.
VAT Treatment on Company Cars
VAT rules apply differently depending on how the vehicle is used.
Fully Electric Cars:
- Input VAT is generally not reclaimable on the purchase of a car, unless it’s used 100% for business purposes with no private use — which is rarely the case
- VAT on charging costs may be reclaimable, depending on:
-
- Who pays
- Where charging takes place (home, workplace, public station)
- How the electricity is billed
HMRC issued updated guidance in 2023 and again in 2025 to clarify VAT reclaim rules on home charging where the employee is reimbursed. Check your arrangements carefully.
Electric Vans: Even More Favourable
If you provide a zero-emission van, the benefit in kind is 0% for 2025/26 — so both the employee and the company pay no tax or NICs.
Electric vans are treated as plant and machinery and qualify for the full expensing regime or 50% FYA depending on the date of purchase and nature of use.
Common Pitfalls to Avoid
Despite the advantages, there are some common traps to be aware of:
1. Using the Wrong List Price
The BiK is based on the car’s list price when new, not the amount you paid. Discounts and second-hand purchases are irrelevant for BiK purposes.
2. Not Accounting for Optional Extras
Factory-fitted extras add to the list price for BiK purposes. A top-spec model can push the benefit up significantly.
3. Not Keeping Records of Charging
If you want to reclaim VAT on EV charging, or reimburse employees tax-free, you need accurate records — including mileage logs and energy use.
4. Charging Facilities as a Benefit
Workplace charging for employees is not a taxable benefit, even if the employee charges their own car — provided the charger is at or near work.
Future BiK Rate Changes for EVs
The current 2% BiK rate for electric vehicles is fixed until April 2025, but HMRC has already announced modest rises:
| Tax Year | BiK Rate for EVs |
|---|---|
| 2025/26 | 2% |
| 2026/27 | 3% |
| 2027/28 | 4% |
| 2028/29 | 5% |
These increases are gradual and still well below the rates for petrol and diesel cars. EVs remain highly attractive for long-term tax planning.
Summary: Should Your Company Go Electric?
Switching to electric makes sense for many company car users — especially directors and employees in the higher tax bands. The combination of low BiK, corporation tax relief, and long-term savings make EVs a strong financial choice, even with higher upfront costs.
Going electric makes sense if:
- You’re a director or employee in the 40% or 45% tax bracket
- You’re buying the vehicle through a limited company
- The business has sufficient profits to benefit from capital allowances
- You want to reduce both personal and company tax liabilities
