Why Your Electric Company Car Just Got More Expensive to Run

Anyone driving an electric car through their employer has been paying more tax on it from 6 April 2026 onward, the point at which the benefit-in-kind rate for zero-emission company cars rose from 3 percent to 4 percent. It is a small percentage move on paper, but it is the first of four scheduled increases that will see the rate almost triple by the end of the decade, and drivers who chose an electric company car specifically to minimise tax are watching that advantage shrink on a fixed government timetable.

What Actually Changed on 6 April

Company car tax works by applying a percentage rate, set according to a vehicle’s emissions, to its list price, to produce a taxable “benefit in kind” figure. That figure is then taxed at the driver’s normal income tax rate. For a fully electric car with a £40,000 list price, the 2026/27 rate of 4 percent produces a taxable benefit of £1,600 a year. A basic rate taxpayer pays 20 percent of that figure in tax, which comes to £330 a year, or roughly £27 a month. A higher rate taxpayer on the same car pays 40 percent of the benefit, working out at £640 a year, close to £53 a month.

A year earlier, at the 2025/26 rate of 3 percent, the same £40,000 car produced a taxable benefit of £1,200, meaning a basic rate taxpayer paid £240 a year and a higher rate taxpayer paid £480. The jump from 3 percent to 4 percent has added roughly a fifth to the tax bill for drivers on identical cars, without the car itself, its price, or the driver’s income changing at all.

The Rate Only Goes One Way From Here

The government has already published the schedule for years beyond this one, and it shows a rate that keeps climbing regardless of what happens to electric car prices or the wider market. Having moved from 2 percent to 3 percent for 2025/26 and now to 4 percent for 2026/27, the rate is set to reach 5 percent in 2027/28, 7 percent in 2028/29, and 9 percent in 2029/30. On that same £40,000 car, a basic rate taxpayer paying £320 this year would pay £720 a year by 2029/30, more than double, for driving the identical vehicle.

Petrol, diesel and hybrid company cars remain taxed on a completely different scale, with rates that can run from 25 percent up to 37 percent depending on emissions. Even at 9 percent in 2029, an electric car will still cost a company car driver dramatically less in tax than an equivalent combustion vehicle. The point is not that electric remains the more expensive choice; it does not. The point is that the tax advantage that has been actively marketed to drivers switching to electric company cars over the past several years is being deliberately narrowed, year by year, on a schedule set well in advance.

Vans and the Fuel Benefit Charge Are Rising Too

Company van drivers face their own increase. The flat-rate van benefit charge stands at £4,020 for 2026/27, producing a tax bill of £804 a year for a basic rate taxpayer and £1,608 for a higher rate taxpayer, figures that have also been rising in recent years. Drivers who also receive free fuel for private mileage in a company van face a fuel benefit charge that has climbed to £153.80 a year for a basic rate taxpayer and £307.60 for a higher rate taxpayer.

Fully electric vans currently escape the van benefit charge completely, a gap that has made an electric van one of the more effective tax planning choices available to a company car or van driver right now. That exemption is under the same long-term pressure as the car rate. The Treasury has shown a consistent pattern of narrowing electric vehicle incentives once adoption reaches a critical mass, as happened with the plug-in car grant and, more recently, with the mileage-based road tax now being introduced for electric cars from 2028.

Why This Still Beats a Combustion Car, for Now

Anyone alarmed by a rising number should compare it against the alternative, not against last year’s electric rate alone. A comparable £40,000 diesel company car with typical emissions can sit at a 30 percent or higher benefit-in-kind rate, producing a taxable benefit of £12,000 and an annual tax bill of £2,400 for a basic rate taxpayer, roughly seven times what the same driver pays on the electric equivalent this year. Even after the scheduled rise to 9 percent in 2029, the electric car remains the cheaper option by a wide margin.

Salary sacrifice schemes, where an employee gives up part of their salary in exchange for an electric car provided through their employer, also remain a genuine saving: the arrangement reduces income tax and National Insurance contributions on the sacrificed amount, on top of the comparatively low benefit-in-kind rate. That combination is why electric salary sacrifice schemes have continued to expand even as the underlying benefit-in-kind percentage rises every year.

The Original Pitch Is Getting Harder to Repeat

Fleet managers and leasing companies spent the past several years pitching electric company cars on a simple line: near-negligible tax compared with a combustion equivalent, sometimes as low as a few pounds a month for a higher rate taxpayer on an expensive car. That pitch worked when the rate sat at 1 or 2 percent. At 4 percent now, rising to 9 percent within four years, the same pitch has to include a caveat that did not exist before: the advantage is real, but it narrows every April, on a schedule set out in legislation rather than left to chance.

Drivers who signed a three or four-year lease when the rate was 2 percent are locked into a vehicle whose tax cost rises annually regardless of what they agreed at the point of signing. A driver part way through such a lease has no mechanism to renegotiate the benefit-in-kind rate. Parliament sets it each year, not the leasing company or the employer providing the car.

What Drivers and Employers Should Do

• Check your payslip against the new rate. Payroll software should update automatically, but a mismatch between an old rate and a new list price can result in an underpayment that gets clawed back later. Confirm the P11D or payrolled benefit figure reflects the 4 percent rate for the current tax year.
• Run the numbers forward, not just for this year. A driver choosing a new company car now should model the tax cost across the years they expect to keep it, given that the rate rises annually through to 2029/30 regardless of the car chosen.
• Compare salary sacrifice against a plain company car allowance. The savings depend on your income tax band, pension contributions, and the specific car, so a generic comparison found online will not necessarily match your own figures.
• Employers should review fleet policy documents. A policy written when the rate was 2 or 3 percent could quote figures that are no longer accurate and mislead new starters choosing a company car.
• Ask your employer about an electric van if you drive for work, given that the current full exemption from the van benefit charge is one of the largest remaining tax advantages available and is not guaranteed to last indefinitely.
• Get advice before switching purely to chase a rate. An accountant or payroll specialist can model the total cost across a full contract term, factoring in insurance, servicing and depreciation alongside the tax rate, rather than looking at the benefit-in-kind percentage in isolation.

Drivers comparing an electric car against fresh government incentives, including those covered by the £3,750 electric car grant scheme, should treat the benefit-in-kind schedule as a separate calculation entirely. The purchase grant and company car tax operate under different rules, and a private buyer chasing a discount is not affected by any of the changes to the employer-provided benefit rate. The two systems only intersect for someone who buys a car privately and is later reimbursed or provided with a replacement through an employer, a combination worth double-checking with a payroll department before assuming either set of figures applies.

Sources:

• https://www.gov.uk/guidance/rates-and-allowances-for-tax-on-company-cars
• https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim23110
• https://www.gov.uk/expenses-and-benefits-company-vans