Is this the end of the Company Car?

Having a company car has been a fairly common benefit for employees across many organisations, offering convenience, tax benefits, and flexibility in car options. However, recent changes in tax policy and the shift towards a more flexible, home-based workforce are raising questions about the future of this benefit. The question Reward Heads are debating is: is the company car on its way out?

Tax increases on Company Cars

The most significant recent development is the UK government's decision to raise the employee tax benefit on company cars, starting in 2028. Currently, company car tax rates vary based on the vehicle’s CO2 emissions. For electric vehicles (EVs), which have long enjoyed lower tax rates as part of the government’s push for greener transport, the tax will increase from 2% to 9% by 2029. Hybrid cars will face an even steeper climb, with their tax rate rising from 13% in 2024 to 19% by 2029. The biggest hit will come for non-electric vehicles, whose tax rates will jump from 30% in 2024 to a staggering 39% by 2029.

This increase in company car tax is a part of a broader strategy to incentivise the adoption of electric vehicles and penalise higher-emission vehicles. However, it raises a crucial question:

 “Will employees and employers still be willing to take on the costs of company cars when the tax burden becomes so steep?”

Impact on employee decisions and contracts

One of the key factors driving the future of company cars is the four-year contract cycle that is now typical for many organisations. With contracts being locked in for years, employees making decisions today could be on the hook for higher taxes in just a few years. In fact, many employees will start seeing the increased taxes by 2028, which means that decisions made now could directly affect employees' finances in the near future.

As the tax burden increases, more employees might opt out of taking a company car. While the tax rates for EVs and hybrids are still lower than for petrol and diesel vehicles, the increases could push employees to reconsider whether they want to bear the rising costs associated with a company car.

Increasing demand for flexibility and choice

In today’s workforce, flexibility is more important than ever. Many employees now want to have the option to choose their benefits – whether that is what car they opt for, or whether they opt for a car at all.

With the rise of remote and hybrid working, fewer employees are commuting to an office every day, and many are choosing to use their personal vehicles for travel instead of a company car. The demand for more choice has increased significantly, including the option to choose cash instead of a company car.

For employees who only occasionally need a car for work-related travel, the need for a dedicated company car may feel no longer relevant. With the increasing availability of flexible working arrangements and the potential for more people to work from home, the traditional company car perk could be seen as a less attractive work benefit.

Employees who do still want a company car often feel restricted on the types of vehicles available in the company car policy.  We have seen a rise in the number of electric vehicles included and these are attractive both for those who are concerned with the environment and ongoing costs given they have lower Benefit in Kind (BIK) tax rates compared to their petrol and diesel counterparts.  However, the upfront cost of EVs remains relatively high, making them an expensive option for both employees and employers. Even with the incentives and lower taxes, the high price of EVs may discourage many employees from taking one on.

So… what are the alternatives?

The shift toward Salary Sacrifice schemes

At the same time as the Government announced the planned rises the employee tax benefit on company cars, they announced a change to National Insurance (NI) costs for employers from April 2025.

Cost savings are unsurprisingly a topic of conversation we have heard across many of our clients and network. We expect there to be a push for an increase in salary sacrifice schemes as a way to mitigate the impact of an increase to the NI bill. Popular schemes would include offering an EV salary sacrifice benefit to employees.  Such schemes allow employees to sacrifice part of their salary in exchange for a car at a cost saving rate and in turn make savings across tax and NI.  But be aware that lower earners are unlikely to be able to participate which can force employees into two groups of ‘those who can’ and ‘those who cannot’ take part.

Salary sacrifice car schemes do have many benefits. The monthly lease payments include insurance premiums, servicing and maintenance and the practicalities of these are all taken care of as part of the agreement making it an attractively easy option.  However, the employee has to be willing to pay for a new car, be limited to what the company has in the scheme and be comfortable with the length of contract and end of contract terms. 

Employers may also be considering offering employees a cash allowance as an alternative to company car.  Employers would be subject to the tax and NI on the allowance, at an employee’s prevailing rate but it enables an employee to source their own car, should they require one. Employees may also choose to sacrifice some or all of the cash allowance into a salary sacrifice car scheme if there is one available.

Of course employees may wish to retain their company car.  Organisations should make employees aware of the planned increases in tax at the time of opting into the scheme to ensure they are fully informed before making a choice.  

What about employees who need a Company Car?

For some employees, the company car is not a perk—it’s a necessity. Job needs roles require regular travel for work therefore there are some employees who will still need a vehicle, and the company car remains the most practical option. For these workers, the company car may continue to be a staple of their employment package. However, even in these cases, the type of vehicle being offered might change, as employers will increasingly turn to electric or hybrid options due to environmental goals and tax incentives. The main issue with offering job-need employees EVs is the associated issues which make them less desirable, things such as; range anxiety, charging infrastructure and limited charging points.

Employers may also start to look at alternative solutions for their mobile employees, including fleet management programs, shared vehicles, or even incentives to use personal vehicles for business purposes instead of providing dedicated company cars.

So is the Company Car a thing of the past?

While the company car has long been a staple benefit, recent changes in tax policy, combined with a shift toward more flexible working arrangements and a growing preference for EVs, suggest that we may be nearing the end of the traditional company car era. Rising taxes, particularly on non-electric and hybrid vehicles, could make the option less appealing for employees and employers.

However, company cars are not likely to disappear entirely, especially for employees whose roles require frequent travel. The future of the company car will likely involve a greater focus on electric vehicles, salary sacrifice schemes, and more flexible benefits packages that allow employees to make more personalised choices. As we approach 2028, the rise of EVs, tax rates, and employee preferences will shape the future of company cars.  It is our expectation that cars will continue to be part of the benefits offering—just in a new, more flexible form.

Reward Heads frequently helps clients to look at their benefit packages and we would love to help. Please contact us on rewardsolutions@rewardheads.co.uk