Employee Car Ownership Scheme changes explained

Have you heard about Employee Car Ownership Scheme (ECOS) changes, that will take effect from 6th April 2030?

The government has delayed the reforms and introduced transitional protection for arrangements made before that date. Those arrangements can continue under the existing treatment until they are renewed or varied, or until 6 April 2032, whichever comes first.

If you’re an employer or employee using ECOS, here’s what is changing and what you may need to do.

What is the Employee Car Ownership Scheme?

The Employee Car Ownership Scheme is different from a normal company car scheme.

Under a normal company car scheme, the car is owned or leased by the employer. The employee is then allowed to use it for business purposes and, frequently, private purposes. However, the employee needs to pay Benefit-in-Kind (BIK) tax based on the car’s list price, CO₂ emissions and fuel type. The employer also pays Class 1A National Insurance on the taxable value.

The Employee Car Ownership Scheme works in a very different way. Under ECOS, the car is transferred to the employee from day one. They purchase it under a credit sale agreement. Under the current rules, the company car charge will not usually arise simply because the employee owns the vehicle. However, other tax and National Insurance charges may apply, depending on the terms of the arrangement. At the end of the scheme, the employee can retain the car after settling any outstanding finance, or the employer might buy it back.

Why is ECOS changing?

Chancellor Rachel Reeves announced in the Autumn 2024 Budget that the government would introduce legislation to close loopholes in ECOS. The main motivation was to stop employers and employees circumventing the Benefit in Kind charge.

The government initially planned to introduce the changes in April 2026, before postponing them until October 2026. Following further consultation, it delayed the main changes until 6th April 2030 and introduced transitional protection lasting until April 2032.

ECOS is particularly popular with employers who are either car manufacturers or car dealerships. When they sell cars to employees at a major discount, there’s no BIK because the sale price is below the cost of manufacture or the landed cost of the vehicle.

There are further benefits to automotive sector employers under this arrangement. They will sometimes buy the car back at a specified mileage, allowing the employer to obtain stock for the ‘nearly new’ car market. It’s also suggested that, in some cases, cars have remained listed as part of an employer’s stock and have even been available for test drives!

What are the changes?

The changes are now contained in sections 17 and 18 of the Finance Act 2026, which received Royal Assent on 18 March 2026.

Under the new rules, a car or van transferred to an employee or a member of their family or household will be treated as a taxable company vehicle if one or more of the following apply:

• There are restrictions on the employee’s private use of the vehicle
• Someone other than the employee or family member is the registered keeper of the vehicle
• The arrangement requires the employee or family member to transfer the vehicle to another person after a specified period or in specified circumstances, for an amount determined under the arrangement
• Scheme arrangements are of a description specified in regulations made by the Treasury

Restrictions contained in a reasonable motor insurance policy will not, by themselves, count as restrictions on private use.

The final point is significant. It gives the Treasury the power to bring further types of arrangement within the rules. That does not necessarily mean the end of ECOS, but employers will need to consider how each arrangement works rather than relying on its name.

Arm’s length transactions

The final legislation also introduces an exemption for genuine arm’s-length transactions in the motor industry. A vehicle should not be treated as having been provided by reason of employment if the:

• Employer ordinarily sells or leases vehicles of that kind to the public
• Vehicle is sold or leased to the employee in the normal course of that business
• Terms are ones the employer could reasonably have agreed with an unrelated member of the public

This exemption applies from the 2026-27 tax year. It protects ordinary commercial transactions, not preferential arrangements offering employees terms that would not be available to the public. Other tax charges may still apply, depending on the circumstances.

What impact will the changes have?

The government estimates that the changes will affect some 80,000 individuals who receive cars via ECOS. This is because they’ll become liable for the tax associated with the benefit, although the delay and transitional arrangements mean the main impact will not be felt until April 2030 or later.

Can you help me with the ECOS changes?

If you’re an employer operating an ECOS scheme, we can help you review the way you supply vehicles to employees. This includes checking whether an arrangement will fall within the new rules, whether the arm’s-length exemption applies and when its transitional protection is likely to end.

For example, you can reduce the BIK employees pay by offering lower-emission vehicles or electric cars. A salary sacrifice scheme may also provide significant benefits, depending on the vehicle and the terms of the arrangement.

Talk to your THP account manager today to discuss your options.