Rachel Reeves Car Tax Changes
- MAZ
- Nov 19
- 14 min read
Rachel Reeves Car Tax Changes in the UK: A Practical Guide for Taxpayers and Business Owners
When it comes to understanding tax changes affecting your car expenses or benefits, recent announcements by Rachel Reeves, the UK's Chancellor of the Exchequer (as of late 2025), have sparked a fair bit of chatter. You might have landed here because you want to figure out exactly what these "car tax changes" mean for your wallet—whether you're an employee getting company car benefits, a self-employed contractor driving for business, or a business owner navigating expenses.
Picture this: You're staring at your payslip or business accounts wondering if the shifts in car taxation rules have thrown a spanner in your budgeting or tax planning. Maybe you've heard about higher fuel costs, altered mileage rules, or changes to benefit-in-kind (BIK) tax rates that could impact your tax bill significantly.
Let's cut to the chase: This article is tailored to give you an expert, step-by-step breakdown of Rachel Reeves’s latest car-related tax changes in the UK, focusing on what you actually need to do to stay compliant, identify if you're paying too much or too little, and how best to manage your tax affairs in light of these updates.
Understanding the 2025/26 Baseline: UK Car Tax and Related Rates
Before diving into the specific changes, it's critical to understand the tax landscape for the 2025/26 tax year. This forms the backdrop against which Reeves’s car tax changes are applied.
● The Personal Allowance remains frozen at £12,570.
● Income Tax bands apply as follows (England, Wales, Northern Ireland):
Band | Taxable Income | Tax Rate |
Personal Allowance | Up to £12,570 | 0% |
Basic rate | £12,571 to £50,270 | 20% |
Higher rate | £50,271 to £125,140 | 40% |
Additional rate | Over £125,140 | 45% |
● In Scotland, the rates and bands differ significantly, with the Starter rate starting at 19% and top rates reaching 46%.
● National Insurance thresholds for Class 1 (employed) remain frozen at £12,570 for Primary Threshold.
● Vehicle Benefit-in-Kind (BIK) rates remain a substantial tax lever for company cars, adjusting according to emissions and fuel type. For 2025/26, there’s a gradual increase in rates for certain petrol and diesel cars as zero-emission incentives reduce.
According to HMRC’s latest guidance, the average company car BIK rate has ticked slightly higher this year, mainly to encourage cleaner vehicle adoption and reflect new fuel cost realities.
What Exactly Are Rachel Reeves’s Car Tax Changes?
Rachel Reeves’s announcements in early October 2025 introduced several impactful modifications to how cars are taxed, both for private motorists and businesses. Here’s a breakdown:
1. Increased Benefit-in-Kind Rates for Petrol and Diesel Cars
To nudge businesses and employees towards electric vehicles, the government raised BIK rates for some petrol and diesel company cars by 1-3%, while rates for zero-emission cars remain frozen (0% to 2%). This means:
● Employees driving higher-emission cars will see increased tax liabilities on their payslips.
● Business owners providing company cars may face higher taxable benefits to manage.
2. Changes to Mileage Allowance Payments (MAPs)
The tax-free Approved Mileage Allowance Payments for business travel have been adjusted upward to partially reflect inflation and fuel price increases. The current HMRC rates effective from April 2025 are:
Vehicle Type | First 10,000 business miles | Over 10,000 miles |
Cars/ Vans | 45p | 25p |
Motorcycles | 24p | 24p |
Bicycles | 20p | 20p |
The increase allows employees and self-employed individuals to claim more tax-free mileage for business journeys.
3. Enhanced Restrictions on Car Expense Deductions for Businesses
The government closed some loopholes around claiming expenses for cars not meeting low-emission criteria. For 2025/26:
● Cars with emissions above 150g/km no longer qualify for certain capital allowances.
● The super-deduction scheme for zero-emission vehicle purchases continues but with more stringent eligibility.
4. Impact on Self-Employed and Contractor Drivers
Significant updates affecting self-employed taxpayers include tighter rules on expense claims for day-to-day vehicle costs and an emphasis on accurate mileage logkeeping prompted by increased HMRC enquiries post-COVID remote working shifts.
Why Does This Matter to You?
If you’re an employee with a company car, this means your taxable benefit could have increased, which shows up as higher tax deducted under PAYE. If you haven’t checked your tax code or benefits statement lately, you could be overpaying or underpaying tax.
If you’re self-employed or a business owner deducting mileage and vehicle running costs, you might need to revisit your expense records and claims to ensure compliance and avoid penalties.
Step-by-Step Guide to Verifying Your Car-Related Tax Liability
Let’s get practical. Here’s how to check and calculate your liability or entitlement after these changes.
Step 1: Check Your Company Car BIK Rate
Find your company car's CO2 emissions and fuel type (typically on your P11D form or company car statement).
Refer to the latest
.
Locate the relevant BIK percentage for your car.
Example:
Car Model | CO2 Emissions (g/km) | BIK Rate (2024/25) | BIK Rate (2025/26) |
Petrol hatchback | 130 | 28% | 30% |
Diesel SUV | 160 | 35% | 37% |
Electric vehicle | 0 | 2% (frozen) | 2% (frozen) |
Step 2: Calculate Taxable Benefit
Formula:
Taxable Benefit=Car list price×BIK rate
Taxable Benefit=Car list price×BIK rate
Say your car list price is £30,000 with a 30% BIK rate for 2025/26:
£30,000×30%=£9,000
£30,000×30%=£9,000
This £9,000 is added to your taxable income.
Step 3: Apply Your Marginal Tax Rate
If you’re a basic rate taxpayer (20%), tax due on benefit is:
£9,000×20%=£1,800
£9,000×20%=£1,800
For a higher rate (40%), that doubles to £3,600.
Step 4: Verify Mileage Allowance Claims
Look at your business mileage:
● Multiply miles by HMRC's updated rates (45p first 10,000 miles).
● Compare with your employer’s reimbursements or your self-assessed business expenses.
Example: You drove 12,000 miles for work.
(10,000×0.45)+(2,000×0.25)=£4,500+£500=£5,000
(10,000×0.45)+(2,000×0.25)=£4,500+£500=£5,000
This £5,000 can be claimed tax-free or deducted from taxable profits, depending on your employment status.
Patch Up Your Tax Code: Avoid Common Pitfalls
None of us loves tax surprises, but here’s how to avoid them with these car tax updates:
● Cross-check your tax code every Sept/Oct when PAYE codes update.
● If driving multiple company cars or having varied income sources, be wary of cumulative coding errors.
● Self-employed folks should keep a detailed mileage log, ideally with GPS app records, to meet HMRC scrutiny.
● If you’ve received emergency tax due to an administrative mix-up, reconcile quickly using your personal tax account at
● gov.uk
● .
In my 18 years advising London clients, failing to reconcile car benefits led to costly overpayments—easily preventable with proactive checks.
Real-World Scenario: Sarah’s Overpayment Case
Sarah, an HR manager in Manchester, drove a petrol company car with 150g/km CO2. In 2024/25, her BIK rate was 28%; in 2025/26, it ticked to 30%. Her employer didn’t update her tax code immediately, so PAYE deductions remained based on the old rate for several months.
When Sarah checked her personal tax account, she discovered she overpaid by roughly £360 in tax. She contacted HR and HMRC, triggering a swift correction and refund.
Lessons:
● Always log into your HMRC personal tax account for early alerts.
● Inform your payroll department of any discrepancies.
● Use the updated BIK rates for calculations instead of relying solely on payslips.
Next Steps for Business Owners: Claiming Expenses and Allowances
For you running a small business or freelancing, car-related expenses have nuances under the 2025 reforms.
● Capital Allowances for cars with emissions over 150g/km are now severely limited.
● Low emission or electric vehicles qualify for super-deductions, enhancing cash flow.
● Mileage logs should separate business vs. personal use clearly to avoid tax disputes.
● Expenses like repairs, insurance, and fuel must align with actual business use proportion.
Critical Worksheet: Vehicle Expense Calculation for Businesses and Self-Employed
You can use this personalised table to estimate your deductible vehicle costs.
Item | Total Annual Cost (£) | % Business Use | Allowable Business Expense (£) |
Fuel |
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Insurance |
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Maintenance & Repairs |
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Vehicle Finance/ Lease |
|
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Depreciation/Capital Allowances |
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Parking & Tolls |
|
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Total |
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Instructions: Fill in actual costs and percentage of business use, multiply them to calculate tax-deductible amounts.
This level of detail is essential when HMRC scrutinises self-employed or mixed-use vehicles.
Navigating Complex Income Scenarios: Multiple Jobs, Self-Employment, and Beyond
None of us stick to just one paystream these days—especially with the gig economy boom and side hustles becoming the norm.
If you juggle:
● A PAYE job with company car benefits
● Self-employment or freelance gigs declaring mileage expenses
● Rental income or dividends from a business
then tax calculations can get tricky fast—especially with new BIK tweaks and mileage allowance rates for 2025/26.
How to verify your total tax liability:
Combine all income sources on your Self Assessment tax return (if applicable) or check cumulatively via your HMRC personal tax account (
).
Ensure your PAYE tax code accounts for all taxable benefits (especially new higher BIK rates on petrol/diesel cars).
When calculating expenses from self-employment vehicle use, use HMRC’s Updated Mileage Allowance Payments (MAPs): 45p per business mile for the first 10,000 miles, thereafter 25p.
Keep thorough mileage logs, ideally electronic, to validate your claims since HMRC intensifies checks on mixed income taxpayers.
Scottish and Welsh Tax Band Variations: What You Must Know
As you might recall, Rachel Reeves’ car tax changes operate alongside distinctive income tax systems in Scotland and Wales.
Country | Tax Bands (2025/26) | Income Tax Rates |
England/Wales/N.Ireland | Personal Allowance £12,570 Basic rate up to £50,270 | 20%, 40%, 45% |
Scotland | Starter rate (19%) up to £14,732 Medium rate (21%) to £25,688 Higher (42%) to £43,662 Top (47%) above that | 19%, 21%, 42%, 47% |
Wales | Follows England’s bands but with some regional variances applied via Welsh Revenue Authority | Same rates as England, but administrative differences apply |
What this means for car tax:
● Scottish taxpayers may find their effective marginal rates differ, affecting the tax you pay on company car benefits.
● Welsh taxpayers still follow UK rules for BIK but should keep tabs on future devolved tax announcements.
Handling Emergency Tax Codes With Car Benefits (What to Do)
Ever started a new job and noticed your payslip shows “emergency tax”? This is common when HMRC does not have your full previous income and benefits data.
● Emergency tax codes ignore BIK, so you might be over-taxed initially.
● Use your Personal Tax Account on GOV.UK to update your employer.
● Keep payslips and P60 records to reconcile once your tax code updates.
● Double-check your company car tax benefit matches HMRC’s tables; if incorrect, file for refunds via Self Assessment or P87.
Deep Dive: High-Income Child Benefit Charge (HICBC) and Car Tax Interplay
If your income exceeds £50,000, the HICBC begins clawing back Child Benefit payments. Because the taxable benefit from a company car increases your "adjusted net income," the Reeves car tax hikes could push you into HICBC territory and increase your tax bill unexpectedly.
Practical advice:
● Calculate your income including all BIK taxable benefits to see if you hit the £50,000 threshold.
● Consider opting out of Child Benefit if you expect to pay HICBC (to avoid having to repay it via tax).
● Pay close attention to how added car benefits affect your marginal tax rate and plan accordingly.
Maximising Business Owner Deductions Under 2025/26 Rules
For business owners:
● Business vehicle costs (fuel, maintenance, insurance) are allowable only pro-rata to business use.
● For cars with CO2 emissions over 150g/km, capital allowances are restricted—meaning you can't deduct the full cost.
● The super-deduction remains for zero-emission vehicles (electric or hydrogen), so investing in these can reduce taxable profits significantly.
● Keep detailed logs of mileage and costs for each vehicle to avoid HMRC challenges.
Here’s a simple original worksheet to gauge allowable expenses:
Expense Type | Annual Cost | Business % Use | Allowable Expense (£) |
Fuel | £ | % | = Annual Cost × % |
Insurance | £ | % | = Annual Cost × % |
Maintenance & Repairs | £ | % | = Annual Cost × % |
Lease/Finance | £ | % | = Annual Cost × % |
Capital Allowances | £ (check CO2 band) | % | Consult HMRC rates |
Overpayments, Underpayments, and Refund Strategies
Rachel Reeves’s tax announcements increase the risk of miscalculations. Overpayments can be recovered by:
● Filing a Self Assessment tax return promptly.
● Using the HMRC ‘Check your Income Tax for the current year’ online service.
● Contacting HMRC directly for PAYE correction if your tax code is wrong.
For underpayments, address them ASAP to avoid interest or penalties.
Summary of Key Points
Rachel Reeves introduced higher company car BIK for petrol/diesel vehicles and increased mileage allowances, impacting employees and self-employed alike.
Use HMRC’s personal tax account to check your tax code and benefits in real-time for accuracy.
Keep detailed mileage logs; HMRC scrutiny is intensifying, especially for mixed income earners.
Scottish and Welsh taxpayers must factor in regional income tax differences affecting car tax rates.
Emergency tax codes can cause overpayment—update HMRC and employers promptly.
Increased car benefits can push adjusted net incomes over the £50,000 Child Benefit charge threshold.
Business owners need to carefully allocate vehicle costs to business use and be aware of capital allowance restrictions on high-emission cars.
Super-deductions remain attractive for zero-emission vehicle purchases.
Actively monitor and claim refunds or correct underpayments through Self Assessment or employer adjustments.
Salary sacrifice schemes for electric vehicles remain tax-efficient, cushioning tax rises through the end of the decade.
FAQs
Q1: Can someone change their tax code if it’s incorrect due to company car benefits?
A1: Absolutely. Tax codes often fail to reflect updated Benefit-in-Kind (BIK) values, especially with Rachel Reeves’s recent car tax changes. In my experience, employees whose fuel type or CO2 bands changed find their codes lagging. You can notify HMRC via your personal tax account or ask your payroll to request a correction, avoiding overpayment or underpayment.
Q2: What happens if a taxpayer has two or more company cars at once?
A2: It’s a tricky one. Each car's BIK must be calculated separately using its list price and rate, then combined as a total taxable benefit. HMRC pays close attention here since errors cause significant tax shortfalls or surprises. Freelancers with a temporary hire car alongside a company car, for example, should log each carefully to avoid penalties.
Q3: How do regional income tax differences affect car tax calculations under the new rules?
A3: If you’re in Scotland or Wales, your marginal tax rates on BIK differ due to devolved tax systems. Scottish taxpayers might pay between 19-47% depending on band, potentially increasing car-related tax bills compared to England. Always confirm your local rates before finalising calculations.
Q4: For the self-employed, what counts as allowable car expenses after the 2025 changes?
A4: Business fuel, repairs, insurance, and lease payments are deductible but only to the extent of business use—not personal miles. Capital allowances on cars over 150g/km CO2 are limited. I urge clients to maintain detailed mileage logs separating business from personal travel; otherwise, HMRC may disallow claims.
Q5: Can people with emergency tax codes still claim refunds on overpaid car tax?
A5: Yes, having an emergency tax code often means you paid too much initially because BIK benefits aren’t incorporated. You should check your personal tax account and notify HMRC to correct the code. Keep all payslips and P60s handy to support your refund claim via Self Assessment or P87 forms.
Q6: How do Rachel Reeves’s car tax changes affect child benefit entitlement?
A6: The increased taxable benefit from company cars can push your adjusted net income over £50,000, triggering the High-Income Child Benefit Charge. This means you might need to repay some or all Child Benefit received. I’ve advised clients to calculate carefully to decide if opting out of claims is financially wiser.
Q7: Is salary sacrificing an electric vehicle still tax-efficient with the new BIK rates?
A7: Yes, salary sacrifice for EVs remains a smart move—BIK rates for EVs stay low (3% until 2029). This shelters more of your income from tax even as petrol/diesel car taxes rise. One client reduced their taxable income significantly this way, which cushioned upcoming tax hikes.
Q8: How should business owners handle luxury car surcharges on vehicles over £40,000?
A8: Cars over £40,000 face a £425 yearly surcharge for five years on top of standard Vehicle Excise Duty (VED). Businesses need to factor this into total cost calculations to avoid budget shocks. Some clients negotiated with dealers to find equivalent models just under this threshold to sidestep the levy.
Q9: What are the tax implications of using a personal car for business post-2025?
A9: Updated mileage allowance rates (45p/25p per mile) apply, allowing you to claim tax-free reimbursements or deductions. Make sure you keep accurate, contemporaneous mileage logs—not just rough estimates—because HMRC audits often focus on inflated or unsubstantiated claims.
Q10: If somebody has multiple income streams (PAYE + self-employment), how does car tax interact with their overall tax liability?
A10: You’ll need to combine taxable benefits with other income sources when calculating your total tax bill. This might bump you into higher tax bands unexpectedly. I suggest clients always use their personal tax account or run manual calculations annually to avoid nasty year-end surprises.
Q11: What happens if a business owner misclassifies a car’s emissions band and claims incorrect allowances?
A11: HMRC can disallow the expenses and charge penalties. I’ve seen shop owners in Birmingham caught out after buying cheaper high-emission cars thinking they qualified for super-deductions. Always double-check emissions figures on official documents before claiming.
Q12: Are there any specific considerations for retired taxpayers with company cars or car benefits?
A12: Pensioners often overlook that BIK applies equally, whether or not they’re working full-time. If you’re still receiving company car benefits post-retirement, verify your tax code includes this correctly and consider how it impacts your total income tax, including pension allowances.
Q13: Can someone claim back overpaid car tax if their vehicle classification changed mid-year?
A13: Yes, but it requires filing a Self Assessment tax return or contacting HMRC to update your records. Some clients got refunds after switching to EVs mid-year when older tax rates were incorrectly charged on petrol cars they’d sold.
Q14: Does remote working since 2023 affect mileage claims and car-related taxes?
A14: Definitely. Many people see fewer business miles but don’t adjust claims accordingly. HMRC expects you to keep accurate records that reflect home-to-work vs business travel. In my practice, those who updated their logs avoided costly disputes.
Q15: How does the luxury car surcharge affect second-hand EV buyers?
A15: The surcharge applies if the vehicle's list price was over £40,000 when new, regardless of your purchase price. So even buying a used luxury EV second-hand means paying an annual surcharge. Always check the original list price, not just your price.
Q16: Are there changes in car tax rules affecting taxi or delivery drivers specifically?
A16: Yes, these self-employed groups should be meticulous about distinguishing personal vs business mileage. New rules emphasise keeping electronic logs, especially post-Rachel Reeves reforms targeting gig economy workers to reduce abuse.
Q17: What should contractors do if their company car BIK liability changes mid-contract due to car upgrades or swaps?
A17: Inform payroll and HMRC immediately to update your tax code. Delays can incur emergency coding and overpaid tax. Retain all contracts and invoices showing changes to support any future corrections.
Q18: Can hybrid car drivers expect the same tax rises as petrol/diesel drivers?
A18: Hybrids face moderate BIK increases but typically less than pure petrol/diesel cars. Still, it’s crucial to check your car’s emissions band each year since tiny differences can change tax rates significantly.
Q19: If a taxpayer has overpaid due to dual employment and company car benefits, how can they claim a refund?
A19: Overpayments due to multiple employments require a Self Assessment return or specific claims via HMRC’s online service. Double taxation on BIK benefits is a frequent cause, so keeping detailed payslips and P11Ds from all jobs is vital.
Q20: Are electric vans subject to the same tax changes as electric cars under the new rules?
A20: Mostly yes. Electric vans lose some previous exemptions, facing road tax charges and the luxury surcharge if above £40,000 list price. Businesses using electric vans should factor in these higher costs into budgets, not assume full exemption anymore.
About the Author
Maz Zaheer, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTA and Total Tax Accountants, two premier UK tax advisory firms. With over 15 years of expertise in UK taxation, Maz provides authoritative guidance to individuals, SMEs, and corporations on complex tax issues. As a Tax Accountant and an accomplished tax writer, he is renowned for breaking down intricate tax concepts into clear, accessible content. His insights equip UK taxpayers with the knowledge and confidence to manage their financial obligations effectively.
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