End of ECO Schemes? Draft Legislation Published

Insight /  31 July 2025

At the 2024 budget, the Government announced their plans to tackle the perceived loss of tax and NIC revenue from Employee Car Ownership (ECO) schemes. After a considerable period of silence, draft legislation has been issued setting out the changes to be introduced in October 2026.

What are ECO Schemes?

ECO schemes have been popular in the motoring sector for many years, particularly for car manufacturers and dealerships.

The employer provides its employees with a loan to purchase a new car at less than market value, typically at or near the cost to the employer. The employee takes ownership of the car and uses it for a pre-determined period of say 9 to 12 months at which point it is purchased by the employer and placed into stock for resale as a used car. The second-hand value of the car at the point of buyback can often be similar to the cost price and therefore discharges the loan to the employee (or the majority of the loan).

As the car is owned by the employee rather than the employer, a company car benefit does not arise. Instead, a benefit arises on the amount loaned to the employee. This typically results in a considerably lower tax and NIC liability. In addition, the employer can pay the employee a higher mileage rate for business journeys without a tax and NIC charge arising (up to 45p per mile instead of the company car rate which is lower).

Why is HMRC Introducing the Legislation?

In our experience of reviewing these schemes and dealing with HMRC queries, the main areas of contention are due to significant restrictions being placed on the use of the car in terms of mileage, the condition of the car and the requirement to make the car available for buyback at any point if requested by the employer.

Due to the burdensome requirements imposed on the participants, HMRC take the view that ownership of the car has not actually transferred to the employee so a company car benefit should still apply. Furthermore, there can be some uncertainty on the second-hand value at the point of buyback by the employer.

HMRC therefore describe the schemes as being ‘contrived’ and a ‘loophole’ for the purposes of avoiding tax and NIC liabilities.

What Issues arise for Employers with ECO Schemes?

If implemented, the new legislation will result in a company car benefit in kind arising for cars provided through ECO schemes from October 2026. As mentioned above, the tax and NIC on company car benefits in kind can be considerably higher than a loan benefit. A fuel benefit may potentially arise if fuel is provided for private journeys which is based on a multiplier value regardless of the actual private mileage undertaken so can result in a disproportionate tax charge arising.

Employees participating in an ECO scheme could therefore be faced with a higher benefit in kind value resulting in reduced take home pay due to an increased tax liability. Employers will also be impacted as a result of higher NIC liabilities on the company car and potentially fuel benefits. The current rate of employer NIC on company cars is 15% so the impact could be considerable.

Although their popularity has decreased in more recent years, some employers outside of the motor industry provide company cars through an ECO scheme where the employee has ownership of the car and HMRC’s approved mileage rates are offset against monthly lease costs. It appears these schemes could potentially be caught by the rules, but the exact details of the arrangement would need to be reviewed to determine the impact of the new legislation. If they are caught, the company car mileage rates would apply which are lower than the rates that apply to a car owned by the employee. Again, this would result in an increased cost for the employee.

What should Employers be doing?

Employers with an ECO scheme should review the vehicles provided to employees and determine how the company car/fuel benefit in kind rules will impact the employee tax and employer NIC position. Any additional costs arising from the proposed changes can then be quantified and managed accordingly, e.g. by implementing an alternative arrangement, such as salary sacrifice for an electric company car which are generally a lot more tax efficient than the provision of conventional petrol/diesel company cars.

It is also important to note that the provision of cars to employees can be an emotive issue so employee communications should be managed carefully to avoid a negative impact on staff.

How can UNW Help?

UNW have extensive experience in ECO schemes and company cars. We would be pleased to speak to you about any queries you may have and provide any support required.

If you would like to discuss how we can help you, or have any other employment taxes related queries, please get in touch with us at employmenttaxesteam@unw.co.uk