What the latest PHEV tax changes could mean for company car fleets, salary sacrifice schemes and ECOS

The Government has announced plans to introduce temporary legislation aimed at reducing the impact of revised emissions testing for Plug-in Hybrid Electric Vehicles (PHEVs).

The proposed changes follow concerns that a new emissions testing standard, due to be adopted in the UK from April 2026, could significantly increase official CO₂ emissions figures for many plug-in hybrid vehicles. In turn, this could lead to higher Benefit-in-Kind (BiK) tax rates for company car drivers and increased costs for employers.

Whilst the proposed easement may provide short-term protection for affected drivers, it also raises wider questions about the future role of PHEVs within company car fleets, salary sacrifice schemes and Employee Car Ownership Schemes (ECOS).

From our perspective, this latest development presents an interesting contradiction. At the same time as the Government is consulting on legislation designed to create greater consistency across company car benefit arrangements, it is also considering measures that could preserve favourable tax treatment for certain PHEV drivers, regardless of whether vehicles are regularly charged and driven in electric mode.

As the consultation progresses, fleet operators and employers should be considering the potential implications for vehicle choice, employee benefits and future fleet strategy.

What is changing for plug-in hybrid company cars?

The introduction of Euro 6e-bis emissions testing

From April 2026, the UK is expected to adopt the Euro 6e-bis emissions standard, bringing Great Britain into alignment with testing requirements already operating across the EU and Northern Ireland.

To prepare for this transition, manufacturers have been re-testing plug-in hybrid vehicles since January 2025, with all affected models expected to be reassessed by the end of the year.

The purpose of the new testing methodology is to provide a more realistic representation of real-world emissions.

Historically, PHEVs have benefited from favourable tax treatment because official testing assumed a significant proportion of journeys would be completed using electric power. However, growing evidence suggests many vehicles are not being charged as frequently as anticipated, meaning real-world emissions can be considerably higher than official figures suggest.

The revised testing regime is designed to address this discrepancy.

For some models, official CO₂ emissions could increase significantly, potentially moving vehicles into higher Benefit-in-Kind tax bands.

Currently, many plug-in hybrids benefit from BiK rates of 5%, 8% or 12%. However, if revised emissions figures increase beyond 50g/km of CO₂, drivers could face BiK rates of 15% or higher under existing legislation.

For employees already driving a PHEV, and for organisations that have adopted plug-in hybrids as part of their fleet strategy, this could have a material impact on the overall cost of company car provision.

The Government's proposed temporary easement

Recognising the potential disruption that these changes could create, the Government has announced plans to introduce a temporary easement between April 2026 and April 2028.

The intention is to soften the immediate tax impact of revised emissions testing and provide additional time for both employers and employees to adapt.

Whilst full details are still subject to consultation, the proposal suggests that affected PHEVs may continue to benefit from lower BiK rates than their revised emissions figures would otherwise attract.

For drivers, this could provide welcome short-term protection.

For employers, however, it introduces further uncertainty into fleet planning decisions.

The key challenge is that organisations are being asked to make vehicle strategy decisions today, whilst the long-term tax treatment of plug-in hybrids remains subject to consultation.

Does this change the attractiveness of PHEVs as company cars?

The answer depends largely on the outcome of the consultation.

PHEVs have historically occupied an important position within company car fleets. They have offered lower Benefit-in-Kind tax rates than traditional petrol and diesel vehicles, whilst providing greater flexibility than fully electric alternatives for drivers who regularly undertake longer journeys.

However, the tax environment around PHEVs has been changing for some time.

Even before the latest emissions testing proposals:

• Benefit-in-Kind rates for PHEVs were already scheduled to increase.

• Vehicle Excise Duty advantages have largely been removed.

• Future tax bands have become less dependent on electric range.

• Employers have faced increasing pressure to support decarbonisation objectives through greater EV adoption.

Under current plans, all vehicles emitting between 1g/km and 50g/km of CO₂ are expected to fall into an 18% Benefit-in-Kind band from 2028/29, regardless of their electric-only range.

As a result, many organisations have already begun reassessing the role of plug-in hybrids within their longer-term fleet strategy.

The proposed easement may delay some of that transition, but it is unlikely to remove the need for businesses to carefully evaluate the future viability of PHEVs within employee car benefit programmes.

What could this mean for EV adoption?

Whilst Benefit-in-Kind rates for Electric Vehicles (EVs) are set to increase gradually over the coming years, they continue to offer a significant tax advantage compared with most plug-in hybrid, petrol and diesel alternatives.

This provides employers with a level of certainty that is currently absent from the PHEV market.

For fleet managers, the conversation is increasingly moving beyond vehicle acquisition costs and towards wider considerations such as:

• Total cost of ownership

• Employee affordability

• Tax efficiency

• Carbon reduction targets

• Future legislative compliance

• Vehicle suitability

For many organisations, EVs remain the most predictable route to achieving these objectives.

That does not mean PHEVs no longer have a role to play. In some operational environments, they may continue to provide an effective solution for specific driver groups.

However, employers should ensure decisions are based on genuine operational requirements rather than assumptions around future tax advantages.

Are salary sacrifice schemes still tax efficient?

In short, yes.

Despite gradual increases to EV Benefit-in-Kind rates over the coming years, salary sacrifice continues to offer one of the most cost-effective methods of delivering a company car benefit.

Employees can continue to benefit from:

Access to brand-new vehicles

Salary sacrifice provides employees with access to the latest electric and plug-in hybrid vehicles through a simple monthly deduction from gross salary.

Tax and National Insurance savings

Because payments are made before Income Tax and National Insurance contributions are deducted, employees can often achieve significant savings compared with personal vehicle ownership.

Low Benefit-in-Kind rates

Electric Vehicles continue to attract some of the lowest company car tax rates available, making them particularly attractive within salary sacrifice arrangements.

For employers, salary sacrifice can also deliver:

• National Insurance contribution savings

• Enhanced employee attraction and retention

• Stronger ESG credentials

• A valuable employee benefit with limited direct cost to the business

At a time when employers are managing increased National Insurance costs and broader economic pressures, these benefits remain highly relevant.

Find out more about Lease Electrics EV Salary Sacrifice Scheme

What about PHEVs within salary sacrifice schemes?

The latest emissions testing changes create additional complexity for organisations offering PHEVs through salary sacrifice.

If revised CO₂ figures move vehicles into higher tax bands, employee affordability could be affected.

Some vehicles may also become less attractive when compared with fully electric alternatives.

However, until the outcome of the Government's consultation is known, it would be premature to make definitive conclusions.

In the meantime, employers should consider:

• Reviewing current PHEV eligibility criteria

• Assessing which models remain financially viable

• Modelling potential tax outcomes

• Communicating proactively with employees

• Monitoring future legislative developments

A clear communication strategy will be particularly important, helping employees understand how changing tax rules could affect future vehicle choices.

What about Employee Car Ownership Schemes (ECOS)

Alongside the PHEV consultation, the Government is also progressing draft legislation affecting Employee Car Ownership Schemes (ECOS).

From October 2026, qualifying ECOS arrangements are expected to become taxable benefits.

Under the draft legislation, arrangements may become taxable where:

• Restrictions exist on private use of the vehicle

• The employee is not the registered keeper

• A pre-arranged buyback or onward sale arrangement exists

The intention is to align ECOS more closely with the taxation of traditional company car arrangements.

From a practical perspective, this means the tax treatment of vehicles delivered through ECOS and salary sacrifice schemes will become increasingly linked to vehicle emissions.

As a result, any changes to PHEV emissions figures are likely to have implications across both benefit delivery methods.

This is one reason why the proposed PHEV easement appears somewhat inconsistent with the wider direction of travel outlined within the draft ECOS legislation.

On one hand, the Government is seeking greater consistency in the taxation of employee car benefits. On the other, it is considering measures that may preserve preferential treatment for certain plug-in hybrid vehicles.

The outcome of both consultations will ultimately determine the extent of this impact.

Our recommendations for employers and fleet managers

Whilst there is still uncertainty around the final position, there are several practical steps organisations can take now.

Reassess fleet composition

Review future vehicle requirements and consider whether current vehicle policies remain aligned with your tax, operational and sustainability objectives.

Review employee car benefit strategy

Consider how salary sacrifice, company car and ECOS arrangements fit within your wider employee benefits offering.

Model future costs

Assess the potential impact of revised PHEV emissions figures on employee affordability, employer costs and overall scheme participation.

Communicate early

Employees are likely to have questions as tax rules continue to evolve. Clear communication can help manage expectations and support informed vehicle selection decisions.

Stay informed

Both the PHEV consultation and draft ECOS legislation remain subject to change. Regularly reviewing developments will help ensure future decisions are based on the latest available information.