ECOS Tax Benefits Scrapped From October 2026

The UK government has announced a significant shake-up in employee car ownership schemes (ECOS) that will directly affect nearly 80,000 company car and van drivers. From 6 October 2026, the tax advantages previously linked to these schemes will be removed under new measures outlined in the Finance Bill 2025/26.

This change is more than a technical tax adjustment—it represents a complete shift in how company-provided vehicles are treated for tax purposes. For businesses, especially in sectors where ECOS was a popular perk, the financial and operational implications could be substantial. For employees, the end of these tax breaks means higher income tax liabilities and reduced net benefits.

What Are Employee Car Ownership Schemes (ECOS)?

Thousands of employers have used Employee Car Ownership Schemes (ECOS) as an alternative to traditional company car schemes. The model typically allowed employees to “own” the car on day one, often through a structured credit arrangement facilitated by a third party.

The key attraction of ECOS was its ability to avoid benefit-in-kind (BIK) tax charges. Unlike traditional company cars, which are subject to BIK tax on private use, ECOS transferred legal ownership to the employee, making the arrangement more tax efficient.

Many employees benefited from substantial trade discounts in the automotive sector, which meant lower acquisition costs and better overall savings.

Why Is HMRC Closing the Loophole?

While ECOS gained popularity, HMRC has long been uncomfortable with the schemes. The tax authority viewed ECOS as a loophole designed to sidestep taxable benefit rules without fundamentally changing the nature of the arrangement.

Under the new Finance Bill, HMRC will bring ECOS into the benefit-in-kind regime, treating them in the same way as traditional company cars or vans if certain conditions are met.

How Will the New Rules Work?

From 6 October 2026, cars and vans made available to employees under ECOS will be treated as taxable benefits where specific conditions apply. These include:

• Restrictions on private use of the vehicle.
• Cases where the employee is not the registered keeper of the vehicle.
• Buyback clauses or structured transfer provisions that undermine genuine ownership.
• Other prescribed arrangements where the ownership terms suggest a continued employer benefit.

Essentially, if the scheme does not result in true and unrestricted ownership by the employee, HMRC will consider it a taxable company car benefit.

Financial Impact of the ECOS Changes

For Employees: Employees who previously enjoyed tax-free vehicle benefits under ECOS will now face income tax liabilities. Depending on the vehicle type, emissions rating, and employee income bracket, this could mean thousands of pounds in extra tax annually.

For Employers: Employers will need to:

• Reassess the cost-effectiveness of offering ECOS.
• Communicate clearly with employees to avoid misunderstandings.
• Consider alternative fleet and company car options, such as salary sacrifice EV schemes, which remain tax efficient.

For HMRC: The government expects to raise £275 million in 2026/27 alone, with revenues settling at around £200 million annually in subsequent years.

Which Businesses Are Most Affected?

The impact will be particularly significant in industries where ECOS has been widely used, such as:

• Automotive retail and manufacturing, where trade discounts amplified the appeal of ECOS.
• Logistics and transport companies that provided vans under such schemes.
• Corporate sectors where company cars remain a key employee benefit.

Employers in these sectors should urgently review whether their current ECOS arrangements fall under the new rules and, if so, begin contingency planning.

Alternatives Employers Should Consider

With ECOS being phased out, businesses will need to explore alternative employee vehicle benefit strategies. Some viable options include:

1. Salary Sacrifice for Electric Vehicles (EVs): Salary sacrifice car schemes for low-emission vehicles remain highly tax-efficient. Employees can exchange part of their salary for a company EV with minimal BIK charges.
2. Traditional Company Car Schemes: While less tax-efficient than ECOS, structured company car schemes provide clarity and compliance. Employers can still negotiate fleet discounts to reduce costs.
3. Cash Allowances: Instead of providing vehicles, some businesses may switch to cash allowances, giving employees flexibility to purchase or lease their vehicles. However, this could increase employee tax burdens.
4. Business Leasing Arrangements: Businesses can also lease cars and vans under corporate agreements, retaining control of fleet costs while offering employees access to vehicles.

Preparing for the Transition

Employers offering ECOS should take immediate steps to prepare for the new rules:

1. Review Current Arrangements – Identify if existing ECOS agreements fall under the new “restricted terms” definition.
2. Model Financial Impact – Calculate how much additional tax liability employees will face and the cost implications for the business.
3. Communicate Early – Provide employees with clear guidance on how the change will affect them.
4. Explore Alternatives – Evaluate EV salary sacrifice and other schemes to remain competitive in recruitment and retention.

The removal of ECOS tax benefits starting in October 2026 represents a major policy change, aligning it with traditional company car schemes in terms of tax liabilities. Employers must quickly evaluate the financial effects of their vehicle benefit policies and keep employees informed. They should also look into alternative tax-efficient electric vehicle salary sacrifice options to stay competitive under HMRC rules. In summary, the tax-efficient ECOS period is coming to an end, so preparing now will help avoid future issues.