Confirmed: Temporary BiK Tax Changes for Plug-in Hybrids

Welcome, Net Zero News readers,

In an exciting development for the electric vehicle market, the UK Government has unveiled a new temporary easement aimed at alleviating the increasing Benefit-in-Kind (BiK) tax liabilities associated with Plug-in Hybrid Electric Vehicles (PHEVs). This measure comes in response to new emission standards that have the potential to significantly impact both employees and employers alike.

As highlighted in the recent Budget announcement, this initiative seeks to provide clarity and consistency in the tax treatment of company cars throughout the UK. By offsetting the effects of updated emission standards, the Government is taking a proactive approach to ensure that the transition to greener vehicles remains economically viable for all stakeholders.

The new regulation ties into the European Union’s Euro 6e-Bis standard, which has already been implemented in Northern Ireland since January 2025 and is set to take effect in the rest of the UK from April 2026. This regulation introduces a stricter testing regime that alters how vehicle CO2 emissions are calculated, leading to some PHEV models potentially experiencing a doubling of their emissions figures. Such a drastic shift would have resulted in ‘cliff-edge’ tax increases for drivers, substantially raising their BiK tax bills and potentially complicating salary sacrifice schemes, capital allowances, and the provision of 100% corporation tax relief.

In response to these challenges, the UK Government has committed to consulting this year on the proposal to mandate the new emission regime for all new vehicle registrations in Britain starting in April 2026. On 21 July 2025, a written ministerial statement was published, outlining the intention to mitigate the impacts of the new emission standards. This statement also included a commitment to extend the easement retroactively in Northern Ireland to 1 January 2025, where the new standards have already been enforced.

For those affected, this new measure is expected to have a significant impact. The changes will increase the BiK tax owed on PHEV company cars, a tax directly linked to CO2 emissions. The easement will benefit approximately 150,000 employees who enjoy the private use of a PHEV through their employer, thereby preventing a surge in costs for these individuals.

During the summer, the Government acknowledged the importance of taxing higher-emitting vehicles more heavily. However, they also recognised that company cars continue to play a vital role in the transition towards zero-emission vehicles and the wider decarbonisation of transport. This balance reflects a commitment to encouraging the adoption of greener alternatives while ensuring that the tax system remains fair and manageable.

The easement will be applicable retroactively from 1 January 2025 to 5 April 2028, with transitional arrangements in place for certain PHEVs until 5 April 2031. The necessary legislation will be introduced in the Finance Bill for 2025/26 to formalise these changes.

During the easement period, the CO2 emissions figure for qualifying PHEVs will be deemed a nominal 1g/km for the purposes of the Benefit-in-Kind charge, rather than the CO2 figure listed on the registration document. This adjustment is expected to reduce the BiK charge value, potentially lowering tax rates for some models significantly.

The Government has also indicated that employees who are affected by the retrospective element of the easement will be able to claim repayments for any overpaid tax via the reporting system used by their employers. This measure aims to ensure that employees are not unfairly penalised during the transition period.

Furthermore, the Treasury anticipates that some employees who currently drive petrol or diesel company cars may opt to switch to PHEVs during the easement period, encouraged by the reduced tax liabilities associated with these greener vehicles.

To qualify for the easement, vehicles must meet specific criteria:

• The vehicle must have been first registered on or after 1 January 2025.
• The vehicle’s CO2 emissions figure must be 51g/km or higher.
• The vehicle must be registered under an emission standard other than Euro 6d-ISC-FCM or Euro 6e.
• The car’s electric range must be at least 1 mile.

This announcement is a significant step forward in the UK’s journey towards achieving net-zero emissions and showcases the Government’s commitment to supporting the adoption of cleaner vehicles. With the right policies in place, the transition to a more sustainable transport system can not only benefit the environment but also offer economic advantages for both companies and employees.

As the UK continues to navigate the complexities of emissions regulations, the introduction of this easement underscores the importance of a balanced approach that fosters innovation in the automotive sector while ensuring that tax liabilities do not become a barrier to the adoption of cleaner technologies.

In conclusion, this new temporary easement is more than just a financial adjustment; it represents a strategic move towards a greener future. By facilitating the use of PHEVs through reduced tax burdens, the Government is not only supporting individual employees but also contributing to the broader goal of decarbonising the transport sector. As we look ahead to the roll-out of these measures, it will be fascinating to see how they influence the market and encourage more drivers to embrace electric mobility.

Thank you for joining us in exploring this pivotal development in the realm of green transport. Stay tuned for further updates as we continue to track the progress of the UK’s journey towards net-zero emissions.