UK Electric Car Tax Loophole
- MAZ
- 18 minutes ago
- 12 min read
Understanding the UK Electric Car Company Car Tax Loophole in 2025/26 – BIK Rates, VED Changes and Salary Sacrifice Benefits
The real "loophole" that still exists in November 2025 – and it's entirely legal – is the extraordinarily low company car tax (Benefit in Kind or BIK) on pure electric vehicles, combined with salary sacrifice schemes. As of the 2025/26 tax year, a zero-emission EV attracts just a 3% BIK rate. Compare that to a typical petrol or diesel company car at 25–37% and you see why I've had clients literally slashing their monthly motoring costs by hundreds of pounds. Think of it like this: your tax code is suddenly giving you a first-class upgrade on four wheels.
What Exactly Changed with VED (Road Tax) for EVs in 2025?
From 1 April 2025, electric cars lost their full Vehicle Excise Duty exemption – a rule confirmed by HMRC and the DVLA back in 2022 and implemented without delay. Here's the current position as of November 2025:
● EVs first registered before 1 April 2025: now pay the standard £195 annual rate (or £20 if registered before 1 April 2017).
● Brand-new EVs registered on or after 1 April 2025: £10 in the first year, then £195 annually from year two.
● Expensive Car Supplement (often nicknamed the "Tesla tax"): any EV with a list price over £40,000 pays an extra £425 a year for five years (years 2–6). Total £620 per year during that window.
Official source: GOV.UK Vehicle tax for electric and low-emission vehicles. You can verify your own car's exact rate on the DVLA site using your registration number – it takes thirty seconds and removes any doubt.
Why the Company Car BIK "Loophole" Remains So Powerful
Company car tax is calculated on the car's P11D list price × BIK percentage × your personal income-tax rate.
For 2025/26:
● Pure electric (0 g/km CO₂): 3%
● Most petrol/diesel equivalents: 25–37%
A quick real-world example I've run for dozens of clients: £50,000 Tesla Model 3.
Taxpayer type | BIK on EV (3%) | Monthly tax approx. | Equivalent petrol car at 30% BIK | Monthly tax on petrol |
20% basic rate | £3,000 taxable benefit → £600/year tax | £50 | £15,000 benefit → £3,000/year tax | £250 |
40% higher rate | £1,200/year tax | £100 | £6,000/year tax | £500 |
That's £400–£450 a month saved in tax alone before you factor in fuel/electricity savings. I've seen teachers, nurses and mid-level managers driving cars that would otherwise be completely unaffordable privately.
The Early VED Renewal Trick That Saved Drivers £30 Million (Now Closed)
You might have heard about the clever pre-April 2025 renewal that let existing EV owners lock in another full year of £0 VED. Over 300,000 drivers did exactly that, costing the Treasury an estimated £30 million. That window slammed shut on 31 March 2025 – renewals now trigger the £195 charge immediately. Lesson learned: tax rules change, but acting early on official guidance can pay off handsomely.
Real Client Story – From Sceptic to Convert
Sarah, a London accountant earning £68,000, was paying £420 a month to personally lease a hybrid SUV plus fuel. We switched her to an EV via salary sacrifice. Her new monthly payment dropped to £289 all-in, and her take-home pay actually went up slightly because of the tax savings. "I thought company cars were just for executives," she told me. Six months in, she's charging for pennies at home and grinning every payday.
The bottom line for 2025/26? If your employer offers a company car scheme (or is willing to set one up), pure electric remains the closest thing to a tax-free motoring perk the UK still has. But it won't stay this generous forever – rates are already legislated to rise.
Maximising the EV Salary Sacrifice Tax Advantage in 2025 – Step-by-Step Setup, Real Savings and Employer Benefits
Salary sacrifice is the rocket fuel that turns the low 3% BIK into life-changing savings. You agree to reduce your gross salary in exchange for the non-cash benefit of a brand-new electric car. Because the sacrifice happens before income tax and National Insurance, you keep far more of your money.
How Salary Sacrifice Actually Works in Practice
Your employer leases the EV (usually 2–4 years).
You sacrifice a fixed monthly amount from gross pay.
HMRC treats the car as a Benefit in Kind at just 3% for pure EVs in 2025/26.
No tax or NI on electricity if charged at work (electricity isn't classed as "fuel" – another neat perk).
The result? Basic-rate taxpayers typically save 30–40%; higher/additional-rate taxpayers 40–60% versus personal leasing or buying.
Example car: Kia EV6 £48,000 P11D, 3-year/30,000-mile lease | Personal contract hire (after-tax money) | Salary sacrifice (higher-rate taxpayer) | Monthly saving |
Monthly cost before tax advantages | £650 | £650 gross sacrifice | - |
After tax & NI savings + low BIK | - | Effective £312 net | £338 |
That's £12,168 saved over three years on this one car – enough for a very nice family holiday every year.
Why Employers Love Offering EV Salary Sacrifice (And Often Pay Nothing Extra)
Employers reclaim their 13.8% National Insurance on the sacrificed amount. On a £600 monthly sacrifice that's £83 saved per employee per month – usually enough to cover admin and make the scheme cost-neutral or even profitable for the company. I've helped firms with just 40 staff roll this out in under a month; uptake is normally 15–25% within the first year.
Common Myths I've Heard From Clients – Busted
● "It wrecks my pension." Most modern schemes now let you keep salary at the pre-sacrifice level for pension calculations. Always check.
● "What about maternity/pay rises/death-in-service?" Good providers reference your original salary for these.
● "I'll fall below minimum wage." Reputable schemes cap sacrifice to prevent this – HMRC rules are strict.
Another Real Story – The MD Who Saved His Team £180k
A Midlands engineering firm I advise had 72 drivers on diesel company cars paying £400–£600/month in BIK tax. We switched to EV salary sacrifice. Year-one savings for employees: £180,000 collectively. The company saved £28,000 in employer NI and cut its Scope 1 emissions by 68%. The MD now drives a Porsche Taycan and jokes that going green was the best financial decision he ever made.
Choosing the Right Scheme Provider in 2025
Look for:
● Fully HMRC-compliant OpRA (Optional Remuneration Arrangement) wording.
● No hidden early-termination penalties beyond the statutory.
● Inclusive maintenance, insurance contribution, and breakdown cover.
● Ability to add home charger installation (often interest-free).
The salary sacrifice route is still wide open in November 2025 and, unlike the old VED trick, shows no sign of closing soon – the government actually wants more company EVs on the road.
Advanced EV Company Car Tax Planning for 2025 Onwards – Future BIK Increases, Hybrid Pitfalls and Long-Term Strategies
Rates are already locked in until 2030, so we can plan with certainty. The 3% BIK for 2025/26 rises 1% per year to 5% in 2027/28, then jumps 2% per year to 9% in 2029/30. Still a bargain compared with petrol/diesel, but the golden window is narrowing.
Projected BIK Tax on a £50,000 EV for a 40% Taxpayer
Tax year | BIK rate | Annual taxable benefit | Annual tax cost | Monthly approx. |
2025/26 | 3% | £1,500 | £600 | £50 |
2026/27 | 4% | £2,000 | £800 | £67 |
2027/28 | 5% | £2,500 | £1,000 | £83 |
2028/29 | 7% | £3,500 | £1,400 | £117 |
2029/30 | 9% | £4,500 | £1,800 | £150 |
Lock in a four-year salary sacrifice now and you'll ride the low rates almost to the end.
Why Plug-in Hybrids Are Losing Their Shine Fast
From April 2028 the electric-range gradient disappears – most PHEVs jump to 18–19% BIK. I've already moved several clients out of PHEVs into pure EVs to future-proof their costs.
Capital Allowances and Workplace Charging – The Business Owner Bonus
Limited companies buying EVs outright still claim 100% first-year allowances until 31 March 2026 (confirmed extended in the 2024 Budget). Add the Workplace Charging Scheme (£350 per socket, up to 40 sockets) and the maths becomes irresistible.
One Final Client Anecdote – The Couple Who Timed It Perfectly
Mark and Lisa, both higher-rate taxpayers, ordered two EVs via salary sacrifice in February 2025. Their combined monthly saving: £840. By the time BIK hits 9% they’ll be out of the contracts and into their next cars – probably hydrogen if it arrives, or whatever the next tax-efficient option is. "We basically got two brand-new cars for the price of one old one," Mark told me over coffee last month.
Summary of Key Points
● 3% BIK in 2025/26 remains the lowest company-car tax rate in decades – use salary sacrifice to maximise it.
● VED is now £195 (plus £425 supplement on >£40k cars) but pales compared with the BIK savings.
● Future rises are legislated and gradual – act before April 2026 for the sweetest deals.
● Employers and employees both win; the only losers are those who stick with petrol/diesel company cars.
If your employer doesn't yet offer an EV salary sacrifice scheme, forward them this article – many of my best schemes started exactly that way.
FAQs
Q1: Can an employee on a low salary still join an EV salary sacrifice scheme without dropping below the National Minimum Wage?
A1: Absolutely, and this is one of the most common worries I hear from clients in retail or hospitality earning around £25,000–£30,000. Reputable schemes are required by HMRC to include a safeguard that automatically reduces or pauses the sacrifice if your remaining cash pay would fall below NMW at any point in the year. I've set these up for nursery workers and care assistants where the monthly sacrifice drops to almost nothing during quieter months. It's not a loophole—it's a legal requirement—so always ask the provider to show you their NMW compliance wording before signing.
Q2: What happens to the EV salary sacrifice arrangement if the employee goes on maternity or long-term sick leave?
A2: In my experience, this trips up more people than you'd think—especially younger families. Good schemes reference your original pre-sacrifice salary for calculating maternity pay, statutory sick pay, and even pension contributions. I've had clients continue driving their Kia e-Niro throughout maternity because the provider simply paused the sacrifice and the employer covered a small top-up. Always get the life's big events clause in writing; the dodgy providers will try to make you hand the keys back.
Q3: Does the low 3% BIK rate apply if the electric company car is a van rather than a car?
A3: Ah, the double-cab pickup question dressed up as an EV! No—HMRC reclassified most double-cab pickups as cars from April 2024, but pure electric double-cab vans (like the Maxus eDeliver or Ford E-Transit Crew Van) are still treated as vans. That means zero taxable benefit if only negligible private use, or just the flat £3,996 van benefit (£799 tax for a higher-rate payer) if significant private use. I've saved construction firm owners thousands by choosing crew vans over SUV-style EVs.
Q4: Can a director of a small limited company set up salary sacrifice for themselves and still claim the employer NI savings?
A4: Yes, but with a caveat I've seen bite a few over-confident owners. The company saves the 15% employer NI on the sacrificed amount, which often makes the whole scheme cost-neutral. However, if you're the only employee or sacrifice too aggressively, HMRC might argue it's not a genuine salary reduction. I always structure it with a proper OpRA agreement and keep the director's remaining salary sensible—usually above £50,000 if dividends are high—to avoid any anti-avoidance challenge.
Q5: What tax hit occurs if an employee leaves the company mid-contract on a salary sacrifice EV?
A5: Early termination is the number-one regret I hear. Most leases run 3–4 years, and walking away usually triggers a penalty of 30–50% of remaining rentals. Some modern schemes now include job-loss protection (the provider takes the car back with little or no charge after three months' notice), but it's rare. One client in Manchester paid £4,800 to exit a Polestar 2 when made redundant—painful, but still cheaper overall than buying privately.
Q6: Is workplace charging still completely tax-free for employees in 2025/26?
A6: Yes, and it's one perk that hasn't budged. Electricity provided at work (or reimbursed for home charging if on business mileage) is not a taxable benefit—HMRC still doesn't class electricity as “fuel” for BIK purposes. I've had NHS trusts install pods and save staff £1,200–£1,800 a year each in home charging costs, all tax-free.
Q7: Can Scottish taxpayers use salary sacrifice EVs even though income tax rates differ north of the border?
A7: Of course—the BIK is calculated UK-wide at the same 3% rate, then Scottish rate bands apply to the taxable benefit. A higher-rate Scottish taxpayer pays 42% on the BIK instead of 40%, so roughly £60–£80 extra tax per year on a £50k car. Still an absolute bargain. I've run the numbers for Edinburgh clients and the savings are only marginally less than in England.
Q8: What about directors who already take a low salary/high dividend—does salary sacrifice still make sense?
A8: Surprisingly often, yes. Even if your salary is only £12,570, sacrificing £400 gross to get a £45,000 EV usually leaves you far better off because the BIK tax is tiny and you avoid paying for the car out of heavily taxed dividends. One plumbing firm director I advise dropped his dividend by £15,000 a year and drives a Tesla Model Y for £220 net a month—massive win.
Q9: If the company buys the EV outright rather than leases it through salary sacrifice, what capital allowances are available in late 2025?
A9: The 100% first-year allowance for new zero-emission cars was extended in the 2024 Budget and runs until 5 April 2026 for unincorporated businesses and 31 March 2026 for companies. Buy before then and the whole cost (even a £90k Porsche Taycan) goes against profits immediately. After that date it drops to 18% writing-down—still decent, but the timing matters hugely for cash flow.
Q10: Can self-employed sole traders claim anything like the company-car BIK advantage on a pure electric car?
A10: Not the BIK rate itself, sadly—no salary sacrifice for yourself. But if you buy a brand-new zero-emission car before 5 April 2026 you still get the 100% first-year allowance at your business-use percentage. A freelance photographer I know in Bristol put a Rivian R1T through at 80% business use and wiped out nearly £70k of profit in one year—perfectly legitimate.
Q11: Does the expensive car supplement (£425 VED) apply differently to salary sacrifice or company cars?
A11: No difference at all—the supplement kicks in if the car's list price (including options and delivery) was over £40,000 when new, regardless of how it's funded. The only twist is that the employer usually pays the VED on salary-sacrifice cars, so you don't feel it directly in your pocket.
Q12: What happens if an employee has two jobs and one offers salary sacrifice—does the sacrifice affect tax on the other income?
A12: The sacrificed amount reduces your total PAYE income, so yes—it can pull you down a tax band on the second job's earnings. I've seen teachers with tutoring income on the side drop from higher-rate to basic-rate overall and save an extra £2,000–£3,000 a year. Just make sure both payrolls are coded correctly.
Q13: Are used electric cars eligible for salary sacrifice schemes?
A13: Some providers now offer nearly-new or ex-demo EVs (6–18 months old) at lower monthly sacrifice, and the BIK is still based on the original list price—so you often get an even better deal. A client in Leeds swapped to a 12-month-old Ioniq 5 and cut his monthly cost by £120 compared with brand new.
Q14: Can partners in a partnership set up salary sacrifice for an EV used across the business?
A14: Not strictly salary sacrifice (that's an employment contract thing), but you can allocate the EV as a partnership asset, claim 100% FYA if bought new before the deadline, and charge private-use contributions from each partner. Works particularly well for husband-and-wife firms.
Q15: Is home charger installation still tax-deductible if the EV is on salary sacrifice?
A15: The employer can provide and install a home charger completely tax-free—it's treated as a non-taxable benefit linked to the company car. Many schemes bundle a free or heavily subsidised pod (worth £800–£1,200) into the package.
Q16: What tax implications arise if the company reimburses home charging costs for a salary-sacrifice EV?
A16: If done via the advisory electricity rate (currently 8p per mile from September 2025), it's completely tax and NI-free for business miles. I've seen firms pay staff an extra £80–£120 a month this way with zero tax hit.
Q17: Does the 3% BIK rate apply to range-extender EVs like the old BMW i3 REx?
A17: No—any petrol or diesel engine, even as a generator, pushes it into the 5–37% hybrid/petrol bands depending on CO₂. Pure battery-only is the golden ticket.
Q18: Can additional-rate (45%) taxpayers still come out ahead with EV salary sacrifice?
A18: Without question. On a £600 gross sacrifice, a 45% taxpayer saves around £360–£380 a month after the tiny BIK, versus £250–£280 for a 40% taxpayer. The higher you earn, the bigger the percentage win.
Q19: What happens to pension contributions when salary is sacrificed for an EV?
A19: This is the one that keeps HR directors awake. Most decent schemes now calculate employer pension contributions on your notional pre-sacrifice salary—otherwise you'd lose out badly. I've renegotiated this for several firms; it's usually just a policy tweak.
Q20: If an employee dies or becomes seriously ill, does the family keep the salary-sacrifice EV?
A20: Compassionate clauses are becoming more common. The better providers waive early-termination fees entirely on death or critical illness and let the family keep the car until the end of the month or even transfer the agreement. I've only had to invoke this twice in fifteen years, but when it happens it's an enormous relief for the family. Always check the small print—some older contracts are brutal.
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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