Three-year window of opportunity for low tax PHEVs

For many company car drivers - those in rural locations, for example, or for high mileage drivers, for whom the transition to a fully battery electric vehicle is a more difficult prospect - the opportunity to choose a plug-in hybrid (PHEV) supported by favourable benefit-in-kind taxation will be welcomed.

Prior to this announcement from the Labour Government, car manufacturers have been producing PHEVs with increasingly greater battery range, and will no doubt continue to do so with greater variety now that the Mandate rules have been relaxed.

While this rule relaxation might sound advantageous to fleets not able to move to a fully electric fleet, Grosvenor is warning that the window of opportunity for the low BIK tax is a narrow one.

The privately-owned contract hire, fleet management and EV salary sacrifice specialist advises that the benefit in kind payable on some plug-in hybrids more than doubles from the start of the tax year 2028/29, making a plug-in hybrid less attractive for company car drivers, but still far more viable than a conventional combustion engine car.

“Fleets and company car drivers should not be lulled into a false sense of security regarding plug-in hybrids,” commented Lee Brown, managing director of Grosvenor. “While the cars can now remain on sale until 2035, the Government’s tax treatment becomes less favourable after three years."

Grosvenor provides the example of the popular fleet vehicle, the BMW 330e plug-in hybrid. It attracts a benefit-in-kind tax banding of 9% for the current tax year, costing a 40% taxpayer £1,734 per annum.

Over the next two tax years, the tax banding steps up by 1% each year to 11%, representing a tax cost of £2,120.

However, in the 2028/29 tax year, the percentage banding leaps to 18%, which means the 40% company car driver would be paying £3,468 per annum, equivalent to a 100% increase.

“There may be drivers who are still not ready for a fully electric car in 3 years' time,” continued Lee, “and for these drivers, despite the escalation in rates, a plug-in hybrid will continue to attract lower BIK tax than many have been accustomed to paying over the years for petrol and diesel models. Also, the choice of fully petrol or diesel models will have declined so significantly due to the ZEV mandate that PHEVs will be the primary alternative to a BEV until they are removed from sale.

“However, we would advise fleet managers to begin reducing the choice of plug-in hybrids on their car policies before the start of the 2028/29 tax year in anticipation of these changes, and start moving towards a fully electric choice list, wherever possible.”

“This is because, while plug-in hybrids play a useful role in helping fleets to decarbonise, and currently provide a better benefit-in-kind tax than traditional petrol and diesel cars, they really have a limited window before fleets should move fully to electric cars. Of course, they will continue to be on sale until 2035 and will provide a better benefit in kind choice than a conventional petrol or diesel car, but the real tax advantages are time-limited.”

Grosvenor said it would be advising fleets of the changes and the appropriate measures fleet managers could be taking to improve efficiency and reduce overall fleet costs.

“It’s important to advise anyone ordering a PHEV of the significant increase in 2028”, concluded Lee.