Changes to Company Car Tax on Plug-in Hybrid Vehicles (PHEVs) in 2025: What You Need to Know
Starting in 2025, plug-in hybrid vehicles (PHEVs) in the UK will face significant changes in the way they are taxed for company car users. These changes come as a result of a stricter emissions testing regime, which aims to reflect more accurate real-world CO2 emission data. The testing distance for Plug-in Hybrid Electric Vehicles (PHEVs) has increased from 497 miles to 1,367 miles to better reflect actual usage patterns. The longer road test will result in a higher proportion of the internal combustion engine use compared to electric driving, thus increasing the average emissions.
As a consequence, many PHEVs will see an increase in their benefit-in-kind (BiK) tax rates, making them less financially attractive for both employers and employees.
Closing the Emissions Loophole: The End of Substantial Tax Benefits
For years, PHEVs enjoyed substantial tax advantages as a company car and also through company car salary sacrifice schemes, largely due to a perceived emissions benefit. However, the loophole that allowed these vehicles to attract very low BiK rates will be closed by the end of 2025 . From January 1, 2025, new and existing PHEVs will be subject to more rigorous emissions testing, which will likely result in higher BiK rates for many models, all news launched in 2025 will have to have their CO2's and range tested under the new system, all existing PHEV models in the market place have to have their new test results published before the end of 2025.
What Has Changed in the Taxation of PHEVs?
The major change is the introduction of a new emissions standard known as Euro 6e-bis, which affects all newly launched PHEVs from January 1, 2025, and all models on sale from December 31, 2024. Under this revised standard, the emissions of PHEVs will be measured more accurately, reflecting both their electric-only driving and their petrol or diesel consumption when the battery is depleted.
In practical terms, this means that PHEVs will now be tested under two different operating conditions:
- When the vehicle is driven with a fully charged battery until it depletes.
- When the vehicle operates with an empty battery and relies on the internal combustion engine.
The official CO2 emissions are then weighted based on a "utility factor" (UF), which adjusts the weight given to each driving mode. Under Euro 6e-bis, this utility factor has been significantly increased to 2,220 km (1,367 miles), reflecting more realistic usage patterns.
Impact of Euro 6e-bis: Why the Changes Matter
The shift to Euro 6e-bis has important consequences for the tax treatment of PHEVs. To understand the impact, let’s look at an example using the BMW X1 xDrive25e PHEV:
- Under the old utility factor (UF), the X1 emitted around 45g/km of CO2, which placed it in a very low BiK tax band (around 8%).
- With the introduction of the Euro 6e-bis UF, the same X1’s CO2 emissions will increase to approximately 96g/km. This substantial increase means that the vehicle’s BiK tax rate will rise to 24%—a significant jump.
For company car drivers, this translates to higher taxes. For instance, a higher-rate taxpayer could end up paying around £3,000 more annually in tax for driving the same vehicle.
Additional Changes in the Future: Looking Ahead to 2027
This tightening of emissions testing is not a one-off change. In 2027, the utility factor will increase again to 4,260 km (2,647 miles), which will further raise the official CO2 emissions values of PHEVs. Taking the BMW X1 as an example, its emissions will increase to 122g/km, pushing its BiK rate even higher.
How Will the Changes Affect Company Car Drivers?
For company car drivers, the revised emissions tests mean several key changes:
- Increased BiK Tax Rates: Many PHEVs that previously attracted low BiK rates will now face higher tax rates, making them less attractive as a company car option.
- P11D Value Increases: As CO2 emissions rise, the P11D value (the list price used for tax calculations) of affected vehicles will also rise, leading to higher tax liabilities.
- National Insurance Impact: Employers will also face higher Class 1A National Insurance contributions due to the increased P11D value of the cars.
What Does This Mean for Businesses and Drivers?
For businesses offering PHEVs as part of their fleet, the tax implications will be more complex moving forward. The higher tax rates and National Insurance costs could make these vehicles less desirable compared to other low-emission alternatives, such as fully electric vehicles.
For employees, the increase in tax liability could have a significant financial impact, particularly for higher-rate taxpayers. As such, it is crucial to review any salary sacrifice arrangements or company car schemes to understand how these changes will affect overall tax costs.
Conclusion: A Shift Towards Real-World Emissions Data
The changes to the taxation of plug-in hybrid vehicles in 2025 reflect a broader shift toward ensuring that emissions testing more accurately reflects real-world driving conditions. While these changes may result in higher costs for company car drivers, they represent a step toward fairer taxation of all vehicle types. Businesses and employees alike will need to factor these changes into their decision-making when choosing company cars in the coming years.
Factory orders placed before 31/12/24
The key thing to be wary of is those employees that ordered a PHEV before this date that have not received it in 2025, the manufacturer could choose to conduct the new testing whilst your car is on order, this could result in you receiving a car with the new revised CO2 and EV range, and therefore you will have a higher tax liability. So check before accepting your new car, if it was tested under the 2024 regulations or if the new Euro 6e-bis.
Every Vehicle Lease have PHEV product in stock for both business contract hire and personal contract under the 2024 tests so these provide a lower tax liability, get in touch today if you want a car now before these huge tax increases by contacting us on 028 9693 6363 or email sales@everyvehiclelease.co.uk