Tax incentives for hybrid cars

As hybrid cars tend to have better fuel economy and lower tailpipe CO2 emissions than conventional models, most forms of current CO2-based car tax are generally lower for hybrids than they would be for an equivalent non-hybrid car.

Vehicle Excise Duty

For cars registered since 1st March 2001, Vehicle Excise Duty (often known as 'road tax' or 'car tax') is based on CO2 emissions. Current tax rates are shown on our car tax micro-site page.

Due to their lower tailpipe CO2 emissions, car tax for hybrid cars is generally lower than it would be for a non-hybrid model. With CO2 levels being reduced by around 20%-25%, hybrid cars are placed three to four tax bands lower than would otherwise be the case.

For example, the equivalent to a hybrid car with CO2 emissions of 100 g/km (Band A) would probably be in Band D – cost wise this translates to a saving of around £95 per year on the 'standard rate'. Larger hybrids potentially offer a greater reduction in annual car tax.

Company Car Tax

When a company car is made available for the private use, a 'Benefit-in-Kind' (BIK) rate is calculated based on the car's value and its tailpipe CO2 emissions. The current BIK rates are shown on our company car tax micro-site page.

As hybrid cars have lower tailpipe CO2, due to their improved fuel economy, company car tax for hybrid cars is generally lower than it would be for a non-hybrid equivalent car. With CO2 levels being reduced by around 20%-25%, hybrid cars are placed many tax bands lower than would otherwise be the case.

For example, the equivalent to a petrol hybrid car with CO2 emissions of 100 g/km (10% BIK rate) would probably be in at least the 15% BIK rate band – cost wise this would translate to a saving of at least £200 per year for a model worth £20,000.

Enhanced Capital Allowances

For some green technologies, businesses are able to claim an Enhanced Capital Allowance (ECA) intended to allow a company or organisation to set the whole cost of the asset (used for business related activities) against its taxable profits in the first-year following purchase.

New cars with tailpipe C02 emissions of less than 110g/km (or 95 g/km from April 2013) are eligible for an ECA. While any technology can qualify, several hybrid models have CO2 emissions under the relevant threshold. Business owned hybrids therefore can lead to significant savings in corporation tax within the year of purchase.

Greener Vehicle Discount

Under the London Congestion Charge scheme, the London Mayor introduced a Greener Vehicle Discount (GVD) with effect from January 4th, 2011. Under the scheme, all models that emit less than or equal to 100 gCO2/km and meet Euro 5 emissions standards qualify for 100% discount (subject to a £10 annual registration fee).

Due to their relatively low CO2 emissions, at least four hybrid vehicles already qualify for the GVD as their emissions are 100 g/km or less and are Euro 5. Note however that the scheme is to be monitored and the GVD discount criteria regularly reviewed. The Mayor already has set in motion a consultation process in 2013 to assess the potential to lower the exemption threshold to 75 gCO2/km.

Next: Hybrid car ownership costs >>

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