Taxation of company cars: The appropriate percentage for tax years 2025 to 2026, 2026 to 2027 and 2027 to 2028
Published 21 November 2022
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Who is likely to be affected
Businesses and employers that provide company cars and employees provided with company cars that are made available for private use.
General description of the measure
As announced in Autumn Statement 2022, for the tax year 2025 to 2026, the appropriate percentage for company cars which produce zero emissions and cars which produce less than 75g of Carbon Dioxide (CO2) per kilometre will increase by 1 percentage point (ppt) up to a maximum appropriate percentage of 20%.
For the tax year 2026 to 2027, the appropriate percentage for these cars will be increased by a further 1ppt up to a maximum appropriate percentage of 21%. For the tax year 2027 to 2028 the appropriate percentage will be increased again by a further 1ppt to a maximum appropriate percentage of 5% for cars which produce zero emissions and 21% for cars which produce less than 75g of CO2 per kilometre.
Rates for all other cars which produce 75g of CO2 per kilometre and above will be increased by 1ppt for the tax year 2025 to 2026 and will then be maintained at this level until 5 April 2028, up to a maximum appropriate percentage of 37%.
Policy objective
This measure will provide long term certainty on company car tax rates including continued incentives for electric and ultra-low emission vehicles, in line with requests from industry and taxpayers.
Whilst the rates will continue to incentivise the take up of electric vehicles and ultra-low emission vehicles, they will also begin the process of equalising rates for electric, petrol and diesel cars in the longer term. In addition, the increase in appropriate percentages will ensure the tax system continues to support the sustainability of the public finances.
Background to the measure
The changes in the appropriate percentage for company cars for the tax year 2025 to 2026 through to the tax year 2027 to 2028 were announced at Autumn Statement 2022.
Detailed proposal
Operative date
This measure will take effect from 6 April 2025 and will apply to the 2025 to 2026, 2026 to 2027 and 2027 to 2028 tax years.
Current law
Sections 121 to 148 of the Income Tax (Earnings & Pensions) Act 2003 (ITEPA) provide for calculating the cash equivalent of the benefit of a company car which is made available for private use. In broad terms, this depends on the list price of the car plus taxable accessories, multiplied by the level of CO2 emissions the car produces, which is expressed as the appropriate percentage.
Proposed revisions
Legislation will be introduced in Autumn Finance Bill 2022 to make the following changes:
Section 139 of ITEPA sets out the basis for calculating the appropriate percentage for cars with CO2 emissions.
For zero emission and ultra-low emission cars section 139(1) ITEPA will be amended to increase the appropriate percentage by 1ppt to a maximum of 20% for tax years 2025 to 2026. An additional 1ppt will be added on top of the changes made to 139(1) ITEPA, to a maximum of 21% to take effect for tax years 2026 to 2027. A further 1ppt will be added on top of these changes made to section 139(1) ITEPA, to a maximum of 21% to take effect for tax years 2027 to 2028.
For all other cars which produce 75g of CO2 per kilometre and above s139(3)(a) ITPEA will be amended to include an additional 1ppt from the tax year 2025 to 26 and to continue at that level for subsequent tax years.
Section 139(3)(b) ITEPA will be left as currently drafted to ensure the 37% appropriate percentage limit remains.
Summary of impacts
Exchequer impact (£m)
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| 0 | 0 | 0 | +95 | +155 | +245 |
These figures are set out in table 5.1 of Autumn Statement 2022 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2022.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure will impact an estimated population of 720,000 employees who drive a company car (the number of cars exceeds this as one driver may drive multiple cars in a tax year – tax per car covers the period of the year the car was held). It is anticipated that these individuals will see increased costs due to the increase in appropriate percentages. Customers affected by these measures will have to familiarise themselves with the increase in charges.
Customer experience is expected to remain broadly the same as there is no change to how individuals interact with HMRC.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
The changes apply equally to all employers providing a company car and employees who drive them. There are no particular impacts on people with protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on the estimated around 100,000 businesses who provide company cars from 6 April 2025. Businesses will need to ensure the new appropriate percentages coming into effect from 6 April 2025 is used for the purposes of calculating company car tax and related charges. One-off costs will include familiarisation with this change. There are not expected to be any continuing costs.
Customer experience is expected to stay broadly the same because the method of reporting company car tax remains the same. The new appropriate percentages will be published in advance to support businesses to familiarise themselves with changes.
This measure is not expected to impact civil society organisations.
Operational impact (£m) (HMRC or other)
This measure will not have any operational impact for HMRC who collect company car tax.
Other impacts
This measure supports the government’s climate change objectives by encouraging the take up of zero and lower emission vehicles which reduces transport carbon dioxide emissions and improves air quality.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The policy will be kept under review through regular communication with taxpayer groups affected by the measure.
Further advice
If you have any questions about this change, please contact Employment Benefit and Expenses Policy Team by email at: policyemploymentbenefitsexpenses@hmrc.gov.uk
Declaration
James Cartlidge MP, Exchequer Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.