Historic Labour Budget brings highs and lows for fleets

Company Fleet  Electric Vehicles 

Labour's first budget since 2010 and the first led by a female chancellor, Rachel Reeves, has delivered benefits and blows to fleets.

The positives include clarity on rates of company car tax until 2030, funding for electric vehicle grants, and an extension of the freeze in fuel duty, along with the temporary 5p per litre cut, for an additional year, saving motorists and fleets £3 billion next year.

Negatives include hikes in benefit-in-kind tax for electric cars and plug-in hybrids, 100% increases in first-year Vehicle Excise Duty for fossil fuel cars and major tax rises for double cabs as they will in future be classed as company cars.

In an industry survey, more than 60% of fleets said the Budget was bad for fleets.

Here is a summary of the key tax announcements:

Fuel duty frozen

The government will continue to freeze fuel duty and extend a 5p per litre cut for one year “to support families and businesses”.

Benefit-In-Kind tax increased

While incentives for electric vehicles are extended until at least 2030, substantial company car tax rises are on the way.

The Conservative government had already confirmed that Benefit-in-Kind (BiK) tax on pure electric vehicles will remain at 2% until 2025, then rise by 1% annually to 5% in 2028.

The new Labour Budget revealed that BiK rates for electric vehicles will increase by two percentage points in subsequent years, rising to 9% in 2029-2030.

However, the biggest rises were reserved for hybrids. The government will scrap the current bandings based on a hybrid’s electric-only range; instead, hybrids with emissions of 1-50g/km will incur benefit-in-kind tax at 18% in 2028 and 19% in 2029.

The rates for all other vehicles will increase by 1 percentage point per year in 2028/9 and 2029/30. The top tax band will also be increased to 39% by 2030.

The changes mean electric cars that run solely on batteries will have a tax advantage of at least 10 percentage points over any other point advantage over vehicles using fossil fuels, including plug-in hybrids, by the end of the decade.

The government also intends to legislate “to close loopholes in company car tax rules by ending contrived car ownership schemes”.

First-year Vehicle Excise Duty doubles for most fossil fuel cars

From April 1, 2025, there will be updates to the first-year rate of Vehicle Excise Duty.

The government will incentivise electric vehicles, but drivers opting for new fossil fuel vehicles will pay more.

The Government will freeze the first-year rate paid by zero-emission cars until 2029/30 and increase all other bands in 2025/26.

Zero-emission cars will pay the lowest first-year rate at £10 until 2029/3030.

Cars emitting 1-50 g/km of CO2 including hybrid vehicles, will incur a charge of £110 for 2025/26, while cars emitting 51-75 g/km of CO2, including hybrid vehicles, will be charged £130.

The government will double the rates for all other new cars from their current level, with one expert calling it a 'shove, not a nudge' towards EVs.

This means first year tax costs for fossil fuel cars will range from £270 to £5,490 for the most polluting vehicles.

Review of Expensive Car Supplement for EVs

In recognition of the “disproportionate impact” of the VED Expensive Car Supplement (ECS) threshold for zero emission cars, the government will consider raising it for electric vehicles. Any change will be announced at a future budget.

The ECS is a tax applied to vehicles with a list price exceeding £40,000, adding £410 annually to Vehicle Excise Duty (VED) for five years following the first year of registration. The tax impacts petrol, diesel, hybrid, and from April 2025, electric vehicles, which were previously exempt.

The UK motor industry had called for the government to exempt electric cars from the tax because they typically cost more than petrol or diesel alternatives. Estimates suggest 70% of electric vehicles would incur the surcharge when it is extended next year.

Double-cabs classed as company cars

The tax treatment of double-cab pick-ups has been a political whirlwind for the past year.

The previous Conservative government introduced, then quickly abandoned, plans to change the tax treatment of double-cabs. Now the Labour government has reintroduced the change.

From the 2025/6 tax year, double-cabs with a payload of one tonne or more will be treated as cars for company car tax purposes, capital allowances, and some deductions from business profits. There will be transitional arrangements to reduce any increases for vehicles acquired before the change.

Under the current rules, double-cab pick-ups are classed as commercial vehicles, with employees paying benefit-in-kind tax on a fixed amount (currently £3,960). As a result, a 20% taxpayer would incur a total annual tax bill of less than £1,000 to have private use of a double cab typically costing £40,000 or more.

The tax changes mean that the benefit-in-kind tax liability of newly-registered double-cabs will rocket by around 400% because they typically sit in the highest CO2 band.

For example, a Ford Ranger has a list price of around £60,000 and CO2 emissions of more than 200g/km, putting it in the 37% company car tax band. An employee’s tax bill would range from around £4,000 for a 20% taxpayer to nearly £9,000 for a 40% taxpayer.

Drivers receiving free fuel for private mileage would also see their tax bill soar because of different tax treatment between commercial vehicles and cars.

The move is likely to renew industry complaints that were an important factor in the previous u-turn under the Conservative government.

At the time, a joint statement from the Treasury and HMRC said: “The government has listened carefully to views from farmers and the motoring industry on the potential impacts of the change in tax treatment.”

The on-off tax change was sparked by a Court of Appeal ruling against Coca-Cola, which had claimed that four-seat crew-cab versions of the Vauxhall Vivaro and Volkswagen Transporter vans used in its fleet ought to be treated as commercial vehicles for benefit-in-kind tax purposes. After Coca-Cola lost the case, HMRC used it as the basis for the proposed double-cab tax changes.

Pothole funding increased

The Government will increase funding for local roads maintenance by 50% for 2025/26. It will invest £1.6 billion to maintain and renew roads, an increase of £500 million on 2024/25.

Increased funding for Plug-In Vehicle Grant

The government is providing £120 million in 2025/26 to support the purchase of new electric vans through the plug-in vehicle grant. Funds will also support the manufacture of wheelchair-accessible electric vehicles.

Higher National Insurance for employers

Employer National Insurance Contributions will increase by 1.2 percentage points from 13.8% to 15% in the 2025/26 tax year.

The threshold at which businesses start paying Employer National Insurance on a worker’s earnings will also be lowered from £9,100 to £5,000.

This provides potential benefits for car salary sacrifice schemes, as these reduce the amount of an employee’s pay that is exposed to NICs for both the employee and employer.

Capital Allowances: Green First Year Allowances

The government will extend for a further year the 100% First Year Allowances (FYA) for qualifying expenditure on zero-emission cars and the 100% FYA for qualifying expenditure on plant or machinery for electric vehicle charge points, to 31 March 2026 for corporation tax purposes and 5 April 2026 for income tax purposes.

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