The dust is only just settling on Rachel Reeves’ Budget as new Chancellor and while much of the media attention has focused on wider economic pledges, we’re seeing a significant spike in interest around car tax changes in 2025, particularly for company cars and electric vehicles.

So, what’s actually changing under the new government? And what does this mean for business owners who operate company fleets or are considering electric vehicles as part of their tax strategy?

In this article, we’ll break down:

  • The new government’s direction of travel on car tax

  • Specific changes that might affect company cars, Benefit in Kind (BIK) rates and electric vehicles

  • VAT and capital allowances implications

  • What to do next if you’re planning to buy or lease a vehicle in your business

Let’s start with what we know and what’s likely to change.

Company car tax electric vehicle tesla

A quick recap: Company cars and car tax before 2025

Before we dive into Rachel Reeves’ car tax changes, it’s worth revisiting how things stood pre-election.

Company cars are taxed as a Benefit in Kind (BIK). The BIK rate is based on:

  • The type of fuel the car uses

  • Its CO₂ emissions

  • The list price of the vehicle

Over the last few years, the government had been nudging businesses and employees toward electric and low-emission vehicles by offering dramatically lower BIK rates. For example, fully electric vehicles attracted a BIK rate of just 2% for 2022/23 through to 2024/25 compared to up to 37% for high-emission petrol or diesel cars.

It was a clear incentive: if your company provided you with an electric car, the tax on that perk was minimal.

Rachel Reeves’ car tax changes in 2025 

Labour’s first Budget has made one thing clear: the new government is prioritising fiscal responsibility while also keeping an eye on green incentives.

No immediate hike, but freezes come at a cost

Rachel Reeves has chosen not to reverse the already-planned rise in BIK for electric vehicles, which will creep up from 2% to 3% in 2025/26 and then gradually to 5% by 2027/28.

In the short term, this is not a dramatic blow to businesses but it does signal a shift away from the ultra-low taxation that helped drive the initial wave of EV adoption.

If you’re planning to put an electric car on the books in 2025, you’ll still benefit from a comparatively low tax charge but the window for super-low rates is narrowing.

Hints at reform for “Unfair company car loopholes”

In her speech, Reeves alluded to “tax loopholes that disproportionately benefit higher earners through company perks” which many are interpreting as a signal that further changes may be on the horizon for salary sacrifice schemes and luxury EVs.

This could include:

  • A clampdown on salary sacrifice arrangements that significantly reduce PAYE and NIC liabilities

  • New thresholds or rate tiers for premium EVs, particularly Teslas and above

  • Tighter definitions around business vs personal use

These changes haven’t landed yet but they’re very much on the radar, and businesses should be planning accordingly.

Car tax changes 2025: Other areas to watch

1. Vehicle Excise Duty (VED) for Electric Vehicles

Previously, EVs were exempt from VED. But starting April 2025, electric cars will pay VED at the same rate as petrol and diesel vehicles, currently £190/year (standard rate after the first year).

For fleets, that means an added cost per vehicle, albeit a relatively modest one. But it’s a sign that the Treasury is looking to normalise tax treatment across fuel types.

If you’re managing a fleet of 10+ electric vehicles, that’s an extra £1,900/year in tax.

2. Luxury car surcharge to apply to EVs

From April 2025, electric vehicles with a list price over £40,000 will no longer be exempt from the luxury car VED surcharge, which adds an extra £390/year for five years.

That’s an effective £1,950 penalty over five years, even for vehicles with zero emissions.

For many business owners eyeing up a Tesla Model Y, BMW i4 or similar, this makes the tax treatment notably less generous.

VAT and Capital Allowances: No change (yet!)

Rachel Reeves has not yet announced any major reforms to the VAT rules or capital allowances on business vehicles. That said, it’s still worth keeping them in mind as you plan ahead:

VAT

  • VAT is reclaimable on a car only if it’s used 100% for business.

  • However, if you lease a car through your business, you can usually reclaim 50% of the VAT on the lease payments, even if there’s some private use.

  • For commercial vehicles and vans, VAT is normally fully reclaimable.

This still makes leasing an EV through your business an attractive option, especially with ongoing VAT relief.

Capital Allowances

  • Electric vehicles currently qualify for 100% First Year Allowances (FYA) which means you can deduct the full cost from your taxable profits in year one.

  • This incentive is set to continue until at least March 2026, giving businesses a tax-efficient reason to go electric sooner rather than later.

Reeves has expressed broad support for investment incentives, so while there’s no guarantee FYA will be extended beyond 2026, it seems likely to remain in place for at least the medium term.

Should you still consider an electric company car in 2025? 

Short answer: Yes but get your timing and structure right.

With BIK rates still low (albeit rising), capital allowances intact, and VAT relief still available on leases, electric vehicles remain one of the most tax-efficient perks you can offer yourself or your employees, especially if structured through a limited company.

However, with rising VED costs and the phasing out of EV-specific exemptions, the numbers are no longer a clear win. It’s now a game of marginal gains, not massive giveaways.

Practical tips for business owners

Here’s our advice for navigating the new tax landscape:

1. Don’t delay if you’re planning to go electric

The best tax savings are still available in the 2025/26 tax year. If you’re thinking of investing in an EV, doing it sooner will lock in lower BIK rates and FYA relief.

2. Consider leasing over buying

Leasing a company car often gives you more flexibility (especially with future BIK rate rises) and can offer VAT savings, particularly if the vehicle is for mixed-use.

3. Look at total cost, not just tax

With VED and surcharge changes, the tax savings may not be as clear-cut as they were in 2022 or 2023. It’s worth crunching the real cost per year, including BIK, VED, insurance and servicing.

4. Avoid premium EV traps

If you’re buying electric cars with a list price over £40k, factor in the five-year luxury car surcharge. It’s a hidden cost that catches many directors out.

5. Review your salary sacrifice schemes

If your business uses salary sacrifice for EVs, keep a close eye on HMRC and Treasury announcements. Rachel Reeves’ comments suggest changes could be coming.

What we’re telling clients

At A4G, we’re advising business owners to take a measured but proactive approach.

The tax landscape is changing, but it’s not flipping overnight. There’s still value to be had in electric vehicles, especially in 2025. But decisions that made sense two years ago may now need a second look.

Every fleet, business and director’s tax position is different. That’s why we recommend modelling your options before committing, whether it’s buying a company car outright, leasing an EV, or using salary sacrifice schemes.

Not sure if your vehicle strategy still adds up?

The tax advantages around company cars and EVs are changing, quietly, but quickly. What looked like a smart move a year ago might now be costing you more than you realise.

If you want clarity on what works in 2025, we’ll help you:

  • Run the numbers on company vs personal ownership

  • Make sense of BIK, VED, VAT and capital allowances

  • Decide whether to buy, lease or use salary sacrifice

Book a free consultation with one of our advisers and make sure your next vehicle decision is a tax-efficient one.

Book a call with one of our team

Keep in the loop with A4G

Rachel Reeves’ car tax changes may be the start of a bigger shift in how business vehicles are taxed. Keep an eye on the Autumn Statement and next year’s Budget—we’ll be publishing updates and guidance as things unfold.

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