More mainstream company cars are being caught by the Government’s expensive car supplement as rising new vehicle prices push an increasing number of models above the £40,000 threshold.
The Vehicle Excise Duty (VED) threshold has remained unchanged for petrol, diesel and hybrid cars since the supplement was introduced in 2017, despite the cost of buying a new car increasing significantly over the same period.
Research from Jato suggests that almost one million vehicles could be affected by the charge in 2026, with the number of cars falling into the category continuing to rise as manufacturers increase prices and specifications.
For fleet operators, the issue is becoming increasingly important when selecting company cars, as a vehicle that would once have been comfortably below the threshold can now trigger an additional tax charge.
The expensive car supplement currently applies to cars with a qualifying list price above £40,000, while the threshold for eligible zero-emission cars is now £50,000. For the 2026/27 tax year, the additional charge is £440 a year and is payable for five years, from the second to the sixth year after the vehicle is first registered.
This means a qualifying vehicle can incur £2,200 in expensive car supplement charges over the five-year period, on top of its standard VED.
What Is The Expensive Car Supplement?
The expensive car supplement is an additional element of Vehicle Excise Duty applied to cars that had a qualifying list price above the relevant threshold when they were first registered.
It is often referred to as the ‘luxury car tax’, although this is not its official name.
For petrol, diesel and hybrid vehicles, the threshold remains £40,000.
For 2026/27, the supplement adds £440 a year to the standard VED rate of £200, meaning qualifying vehicles face £640 a year in VED during the five-year period when the additional charge applies. The Government confirms that the additional rate applies in the second to sixth years after the vehicle’s first registration.
The important point for fleet managers is that the charge is not determined simply by how much a business actually pays for the vehicle.
The relevant figure is the vehicle’s published list price when it is first registered. GOV.UK states that the £40,000 threshold is based on the list price before discounts.
This means a discounted purchase price or leasing deal does not necessarily prevent a vehicle from being caught by the supplement.
Why Are More Mainstream Cars Being Affected?
When the expensive car supplement was introduced in 2017, the £40,000 threshold represented a considerably more expensive new car than it does today.
Vehicle prices have risen significantly over the intervening years, meaning an increasing number of mainstream models can now cross the threshold.
Venson Automotive Solutions has warned that the supplement is increasingly affecting vehicles that businesses would not traditionally regard as luxury cars.
This creates a particular issue for company car fleets, where vehicles are selected according to a combination of price, practicality, safety, equipment, driver requirements and whole-life cost.
A vehicle does not necessarily have to be a premium model to cross the £40,000 threshold.
As manufacturers increase prices and add more equipment as standard, models that were once comfortably below the limit can increasingly find themselves subject to the additional charge.
Electric Cars Now Have A Higher Threshold
There is an important difference between conventional vehicles and zero-emission cars under the current rules.
From 1 April 2026, the expensive car supplement threshold for zero-emission cars increased from £40,000 to £50,000.
The change applies to zero-emission vehicles registered from 1 April 2025 onwards and means qualifying electric cars with a list price above £40,000 but no more than £50,000 are no longer subject to the supplement when the relevant licence takes effect on or after 1 April 2026.
For petrol, diesel and hybrid vehicles, however, the threshold remains at £40,000. The tax position for plug-in hybrids is also changing, making the wider PHEV and BIK rules for 2026/27 an important consideration for company car drivers and fleet managers.
This creates a clear difference in the VED treatment of electric and conventionally powered cars.
An electric car with a qualifying list price of £48,000 can therefore avoid the expensive car supplement, while a petrol, diesel or hybrid car at the same price remains subject to the additional charge.
The Government said the increase in the EV threshold would save more than one million electric vehicle drivers £440 a year.
For businesses considering fleet electrification, the higher threshold provides additional flexibility when choosing electric company cars. The tax advantage is also part of a wider shift towards fleet electrification, with leasing providers continuing to play a role in helping businesses transition to electric vehicles.
However, fleet managers still need to check the individual vehicle’s list price and specification rather than assuming that every EV below £50,000 will automatically qualify.
Optional Extras Can Push A Vehicle Over The Threshold
The £40,000 threshold can also create a headache when drivers are given a choice of specification.
A vehicle can sit below the threshold in its standard configuration but move above it once additional equipment or a higher specification is selected.
This can make decisions around trim levels, wheels, technology packs and other options more important when building a company car choice list.
For example, a business may select a particular model because its headline list price sits below the threshold. If additional equipment takes the relevant list price above £40,000, the vehicle could become subject to the expensive car supplement.
This is why fleet managers need to look beyond the advertised starting price when assessing company car costs.
The Government’s vehicle tax guidance confirms that the relevant list price is considered before discounts.
Businesses therefore cannot necessarily rely on a manufacturer discount or negotiated leasing price to bring a vehicle under the threshold.
What Does The Supplement Mean For Fleet Costs?
The additional £440 a year may appear relatively modest when considered against the overall cost of operating a company car.
However, over the five-year supplement period it adds up to £2,200.
For a single vehicle, that may not dramatically change the economics of a fleet.
Across a larger company car fleet, however, the additional cost can become much more significant.
For example, a business operating 20 qualifying vehicles could potentially face £44,000 in expensive car supplement charges over the five-year period if every vehicle incurred the full charge.
This is why the supplement needs to be considered as part of the wider fleet lifecycle and whole-life cost calculation rather than viewed as an isolated tax charge.
Fleet managers also need to consider the impact on employee choice.
A vehicle that is attractive to a driver because of its specification or additional equipment may have a higher overall running cost than an alternative model that remains below the threshold.
Company Car Choice Lists May Need Greater Scrutiny
The unchanged threshold gives fleet managers another factor to consider when deciding which vehicles should be included on business car leasing schemes.
Rather than simply setting a list of eligible models, businesses may increasingly need to consider the precise specification and list price of each vehicle.
This could mean reviewing:
- Vehicle list prices
- Trim levels
- Optional equipment
- VED liability
- Whole-life costs
- Employee tax implications
- Fuel type
- Electric vehicle eligibility
- Manufacturer price changes
This becomes particularly important when manufacturers introduce model updates or increase prices.
A vehicle that previously sat below the threshold can potentially move into the expensive car supplement category without the underlying vehicle changing dramatically.
For fleet managers, keeping company car policies under regular review can therefore help prevent unexpected costs.
The £40,000 Threshold Has Come Under Scrutiny
The growing number of mainstream cars affected by the supplement has also led to renewed criticism of the £40,000 threshold.
The threshold has remained at £40,000 for petrol, diesel and hybrid cars since the supplement was introduced in 2017, despite significant increases in new vehicle prices.
This has prompted questions over whether the threshold still reflects what would traditionally be considered an expensive vehicle.
The introduction of the higher £50,000 threshold for zero-emission cars has also created a further distinction between electric and other vehicle types.
For businesses operating mixed fleets, this means the tax treatment of a vehicle can now vary significantly depending on its powertrain and list price.
However, there is currently no equivalent increase to £50,000 for petrol, diesel or hybrid vehicles.
For now, businesses selecting these vehicles therefore need to continue working around the existing £40,000 limit.
More Tax Changes Are Coming For Electric Vehicles
The treatment of electric vehicles is also set to change again in the coming years.
The Government has announced the introduction of Electric Vehicle Excise Duty (eVED), a new mileage-based charge for electric vehicles and plug-in hybrid cars that is due to take effect from April 2028. You can read more about the proposed electric vehicle pay-per-mile tax and what eVED could mean for businesses and motorists.
This means fleet managers considering vehicle costs over several years need to look beyond the current VED position.
Electric vehicles currently benefit from the higher £50,000 expensive car supplement threshold, but the wider taxation landscape for EVs is continuing to evolve.
For businesses choosing vehicles on multi-year leasing agreements, understanding how taxation could change during the vehicle’s lifecycle is becoming increasingly important. For businesses considering their next vehicle, these changes are another reason to assess whether leasing an electric vehicle could make sense as part of their wider fleet strategy.
What Should Fleet Managers Do?
The frozen £40,000 threshold does not necessarily mean businesses should avoid vehicles that exceed it.
Instead, effective fleet management means factoring the expensive car supplement into the overall cost of each vehicle.
A car above the threshold may still provide better value if it offers lower running costs, stronger residual values, better fuel efficiency, improved driver appeal or other operational benefits.
However, the additional VED should be identified before the vehicle is added to a company car choice list.
Businesses should also consider whether a comparable model falls below the threshold, whether a different trim level provides better value and whether an electric alternative benefits from the higher £50,000 threshold. Other costs, including ULEZ and Clean Air Zone charges, should also be considered when calculating the overall cost of running a vehicle.
This is particularly relevant as manufacturers continue to add equipment to new vehicles and increase prices.
Fleet managers should also make sure drivers understand that choosing optional equipment can have implications for the vehicle’s overall cost and tax position.
Balancing Fleet Costs With Employee Expectations
The challenge for employers is not simply about minimising tax.
Company cars remain an important employee benefit and can play a role in recruitment, retention and driver satisfaction. Recent HMRC data also highlights the scale and distribution of company car use across the UK.
Restricting choice too heavily in an effort to avoid the expensive car supplement could potentially make a company car scheme less attractive.
Venson Automotive Solutions has reported that its research found one in four employees expects employers to review company car policies and provide greater support as vehicle taxation increases.
Fleet managers therefore need to strike a balance between controlling costs and providing vehicles that meet employees’ expectations.
That may mean giving drivers a wider choice of vehicles below the relevant threshold, providing clear information about the tax implications of different models, or considering electric vehicles where they meet both business and driver requirements.
The most suitable vehicle is not necessarily the one with the lowest list price. Instead, businesses need to consider the complete cost of providing and operating the vehicle.
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