End of the Road for ECO Scheme Tax Breaks: A Major Change for Employee Car Benefits
The landscape of employee benefits is shifting again. In a move to level the tax playing field, the government has announced it will be removing the tax and National Insurance advantages associated with Employee Car Ownership (ECO) schemes, with the new rules taking effect from 6 October 2026.
This isn't unexpected news for those in the know, HMRC has considered these schemes problematic for some time. However, with draft legislation now published, the details are becoming clearer, and businesses need to act.
A consultation on the draft legislation is currently underway and will close on 15 September 2025, meaning the time to understand the impact on your business is now.
What is an ECO Scheme and Why is it Changing?
Simply put, ECO schemes were structured to avoid the benefit-in-kind (BIK) taxes that typically apply to company cars.
Under an ECO scheme, the ownership of the vehicle is transferred to the employee on day one. The employee then pays for the car through a credit arrangement, often facilitated by a third party and deducted from their salary. Because the employee was technically the "owner," the arrangement fell outside the traditional company car tax rules, saving the employee income tax and the employer National Insurance Contributions (NICs).
The government now views this as a loophole. The new legislation aims to ensure that where a car is provided to an employee for their private use as part of their job, it is taxed fairly and consistently, regardless of how the arrangement is structured.
How the New Rules Will Work
From 6 October 2026, cars provided through ECO schemes will be brought into the taxable benefit-in-kind net.
The new "deeming provisions" mean that if a car is made available to an employee (or their family) under "qualifying arrangements," it will be treated as a taxable benefit. These arrangements include, but are not limited to:
Restrictions placed on the employee's private use of the vehicle.
Specific or conditional terms for transferring ownership back at the end of the agreement.
Arrangements where someone other than the employee is the registered keeper.
Industry experts have warned that the draft legislation is drawn very widely. Paul Taylor, Managing Director at Car Benefit Solutions, noted that under a strict interpretation, even an employee who paid for 99.99% of their car via a credit agreement could be liable for full company car tax if a nominal £1 repurchase option exists at the end of the term. This highlights the importance of reviewing any non-standard car arrangement.
What Should Your Business Do Now?
The 2026 deadline may seem far away, but given the complexity of unravelling these schemes and communicating with staff, proactive planning is essential. As Caroline Harwood, Head of Employment Tax at BDO, advised, employers offering these schemes must "evaluate the impact and quickly communicate it to their employees."
We recommend a four-step approach:
Review Your Arrangements: Identify all employees who have a vehicle provided under an ECO scheme or any similar non-standard car benefit arrangement.
Assess the Financial Impact: Calculate the potential BIK liability for each employee and the corresponding Class 1A National Insurance cost for your business. This will reveal the true financial consequence of the new rules.
Communicate Clearly: Speak to affected employees as soon as possible. They will face a higher tax bill, and it's crucial to manage their expectations and explain the changes transparently.
Explore Alternatives: Begin planning for what comes next. This could mean transitioning to a traditional company car scheme, exploring salary sacrifice for Ultra-Low Emission Vehicles (ULEVs) which still benefit from favourable tax rates, or considering cash allowances.
Get Expert Guidance
These changes are a perfect example of how quickly the tax landscape can evolve. Inaction could lead to unexpected tax bills, compliance issues, and unhappy employees.
The team at Zyla Accountants is here to help you navigate this transition smoothly. We can help you review your current schemes, quantify the financial impact, and develop a clear strategy for the future of your employee benefits package.
Don't wait until 2026. Contact us today to ensure your business is prepared.