Following the Budget on 26 November 2025, salary sacrifice for cars remains in place, even if the Chancellor has reduced the impact of salary sacrifice on pension contributions.
Employees will still be able to sacrifice part of their salary and use the National Insurance and tax savings to fund an electric car or low-tax plug-in hybrid car. For employers, salary sacrifice is becoming an essential tool for attracting and retaining employees, while also dovetailing with sustainability goals. Meanwhile employees can drive a zero emission or ultra low emission at a substantially reduced rate if they were to lease the same car personally.
“This is significantly good news from the Budget,” commented Commercial Director of CBVC Vehicle Management, Michelle George.
“Salary sacrifice is an extremely popular method of funding electric cars for our clients and shows no sign of this popularity trailing off. In the latest survey from the BVRLA, salary sacrifice had grown by 118% year-on-year, so for the Chancellor to leave this funding method alone is significant. It will also help accelerate the decarbonisation of the UK car parc.”
Expensive Car Threshold raised
Hand-in-hand with the good news about salary sacrifice is the rise in the threshold for the Luxury Car Tax – or to call it by its proper name, the Expensive Car Supplement. The threshold is being raised from £40,000 to £50,000 for electric cars, which will have a significant impact on those vehicles priced above the current cut-off point.
According to the British Vehicle Rental & Leasing Association, the Luxury Car Tax threshold “will apply to zero emission vehicles (ZEVs) registered from 1 April 2025 onwards. The change applies retrospectively, meaning that most vehicles registered from 1 April 2025 will not be required to pay the charge.”
This change will take effect from 1 April 2026.
PHEV benefit-in-kind given temporary respite
A further significant announcement from the government concerned the taxation of Plug-in Hybrid Electric Vehicles (PHEVs) in the form of a benefit-in-kind (BiK) tax easement.
This strategic measure is aimed at maintaining a predictable and manageable tax liability for drivers and businesses who operate PHEVs, specifically preventing a sharp and potentially prohibitive increase in their BiK tax charge.
Why was this required?
New and more stringent emissions standards are being introduced for PHEVs. Without this temporary relief, the application of the new regulatory framework would, by design, result in a substantial uplift in the taxable value of PHEVs, making them considerably more expensive for company car drivers and their employers, as well as those takers of PHEVs under salary sacrifice.
The effective start date is 01 January 2025 and ends on 05 April 2028.
“This is extremely welcome,” commented CBVC Managing Director Mike Manners. “The defined end date provides clarity for long-term fleet planning and budgeting, and helps those early adopters of plug-in technology not to be unfairly treated.”
EV infrastructure spending increased
To support the further take up of electric vehicles, the government has announced several measures to accelerate the rollout of EV charging infrastructure.
These include:
Increased infrastructure investment: An additional £100 million has been allocated for EV charging infrastructure, supplementing the previously committed £400 million.
Local Authority support: £100 million is being provided to local authorities and public bodies. This funding is specifically for training and deploying specialist staff to accelerate the public chargepoint rollout.
Streamlining installation: A consultation has been launched to explore permitted development rights for cross-pavement EV charging, which aims to simplify the installation process.
Business rate relief: Eligible EV chargepoints and EV-only forecourts will benefit from a 10-year, 100% business rates relief to encourage fleet operators to install at-work charging.
Fuel Duty, VED rises and capital allowances
It wasn’t all good news for motoring in Budget 2025. The cost of motoring will increase in the future.
For drivers of petrol, diesel and plug-in hybrid cars, the temporary 5p cut in Fuel Duty will be lifted in staged increments from September 2026. Then, from April 2027, Fuel Duty will increase in line with RPI inflation.
“For high-mileage delivery van fleets running diesel vans – and that’s most fleets – this will add to the whole life cost of the vehicle,” commented Mike Manners. “It might be advantageous now to think about driver training and Telematics that encourage a more economical approach behind the wheel.”
Meanwhile Vehicle Excise Duty (VED) for cars and vans will rise in line with RPI from 1 April 2026.
A further blow to van fleets that purchase their vehicles is a change in capital allowances. From April 2026 the main rate writing down allowance rate reduces from 18% to 14% which will increase corporation tax bills for those with cars in the 1-50g/km CO2 bracket and goods vehicles, except for zero-emissions vans. The special rate of 6% remains for cars over 50g/km CO2.
But it’s not just combustion cars that face an uptick in running costs.
EV pay-per-mile
Chancellor Rachel Reeves introduced eVED, essentially a way of taxing drivers of electric cars for how many miles they drive each year, and offsets the lost Fuel Duty revenue as drivers switch to electric vehicles.
This ‘pay-per-mile’ tax will be introduced from April 2028. The rates are:
- Electric cars: 3p per mile.
- Plug-in hybrids (PHEVs): 1.5p per mile.
As for how it works, drivers will estimate their annual mileage and pay this charge in addition to the standard Vehicle Excise Duty (Road Tax), with any under- or over-mileages adjusted in the following year’s payment. Mileages will be checked at annual service time. For cars of three years old or more this will be at MOT time.
It’s estimated that an EV driver covering 8,500 miles a year, will pay an additional £255 in annual running costs.
The Government is currently asking for consultation on the best ways to apply eVED particularly for vehicles that are leased.
“While the costs for EV drivers will certainly rise, electric cars and low emission PHEVs still offer the most cost-effective method of company travel,” commented Mike Manners.
Electric Car Grant extended
While the cost of eVED will add to the running costs of an EV, the Government has balanced this with an extension to the Electric Car Grant.
The Grant will now run until 2030 with an additional £1.3bn in funding to encourage uptake. The latest vehicle to qualify for the full grant of £3,750 is the brand new and British-built Nissan Leaf with its 386 mile range.
“Budgets always introduce a level of pain somewhere, and that pain will certainly be felt by individuals and fleets in whatever car they drive through increased driving taxes.
“On the other hand, the easement on PHEV BIK, the threshold increase to the Expensive Car Supplement, and the extension to the Electric Car Grant are to be welcomed, while salary sacrifice for cars remains an attractive incentive for both employees and employers to retain and attract staff,” concluded Mike Manners.
