The UK government has long offered tax incentives to limited companies using eco-friendly company cars. However, as these incentives are phased out from 2025, the Benefit in Kind (BIK) taxation landscape for company vehicles is undergoing significant change. In this guide, we break down the upcoming tax shifts for company vehicles from 2026 and highlight what you need to know for your fleet strategy.
What is a Company Car BIK?
When a company provides a vehicle to an employee or a director, HMRC treats this as a BIK(Benefit in Kind).
- For the Employee/Director: They pay income tax based on the BIK value of the vehicle.
- For the Company: The company is liable for Class 1A National Insurance Contributions (NICs) based on the same BIK value.
The BIK Value is not the tax itself, but the taxable benefit amount used to calculate the final tax liability.
How is the BIK Value Calculated?
BIK Value = P11D Value × Relevant BIK Rate
<Example>
If your company provides an employee with a pure electric vehicle (EV) with a P11D value of £30,000:
- P11D Value: £30,000
- 2026/27 Tax Year EV BIK Rate: 4%
- BIK Value: £30,000 × 4% = £1,200
If the employee is an Additional Rate taxpayer (45%), and the company is subject to Class 1A NICs at 15%. They would pay:
- Employee Income Tax: £1,200 × 45% = £540
- Employer Class 1A NIC: £1,200 × 15% = £180
As the BIK value increases, both the employee’s income tax and the company’s Class 1A NIC liability rise accordingly.
2026 BIK Tax Rate Changes
The government is gradually scaling back tax advantages for eco-friendly vehicles. While EVs (electric vehicles) see a phased increase in BIK rates, hybrid vehicles will face a major structural change in 2028/29.
1. Electric Vehicles (EVs)
EVs remain significantly more tax-efficient than conventional internal combustion engine (ICE) vehicles, which carry BIK rates between 17% and 37%. However, the rates are set to rise:
| Tax Year | BIK Rate |
| 2026/27 | 4% |
| 2027/28 | 5% |
| 2028/29 | 7% |
| 2029/30 | 9% |
2. Hybrid Vehicles
Currently, hybrid vehicle BIK rates are determined by CO₂ emissions and electric range.
- 2026/27 Tax Year: 4% – 16%
- 2027/28 Tax Year: 5% – 17%
Major Change: From 2028/29, the current emission-based structure will be abolished. All hybrid vehicles will be subject to a flat 18% BIK rate. For plug-in hybrids that currently enjoy very low rates, this represents a significant increase in tax liability. Businesses should factor this into long-term lease or purchase projections.
3. Conventional Vehicles
Conventional vehicles continue to be taxed based on CO₂ emissions. The maximum BIK rate is scheduled to rise to 39% by 2029/30.
Vehicle Excise Duty (VED) for Electric Vehicles
From April 2025, electric vehicles are no longer exempt from Vehicle Excise Duty (VED). They are now subject to the same rates as standard vehicles.
- First-year registration: £10
- Annual Standard Rate: £200
Expensive Car Supplement
Vehicles exceeding a certain List Price threshold are subject to an additional annual supplement of £440 for five years (from the second to the sixth year of registration):
- Standard Vehicles: List price > £40,000
- Electric Vehicles: List price > £50,000
Example: Tesla Model Y (List Price £60,000, registered Jan 2026)
| Period | Annual VED Payable |
| First Year | £10 |
| Years 2–6 | £640 (£200 standard + £440 supplement) |
| Year 7 onwards | £200 |
Strategic Recommendations for Your Business
While the tax burden on EVs is increasing, they remain a highly effective tool for tax optimization compared to traditional petrol or diesel cars. However, the complexity of vehicle selection, timing of acquisitions, and the major changes in hybrid taxation in 2028 require careful planning.
Strategic fleet management is essential to balance sustainability goals with fiscal efficiency.
Need expert guidance on your company vehicle tax strategy?
At BH1 Accounting, we specialize in helping businesses navigate complex tax landscapes. Contact our team today to ensure your fleet strategy is both compliant and optimized for the coming years.
Disclaimer: This guide is intended for informational purposes only and does not constitute formal tax advice. Tax regulations are subject to change; please consult with a qualified accountant regarding your specific business situation.