As of October 2025, the UK Government has formally confirmed plans to overhaul the tax treatment of Employee Car Ownership (ECO) schemes, with draft legislation set to take effect in October 2026. The new rules will target so-called "contrived" ECO schemes, which are primarily designed to avoid company car tax.
What's being proposed?
Under the Finance Bill 2025/26, ECO schemes deemed "contrived" by HMRC will no longer benefit from favourable tax treatment. From October 2026, affected vehicles will be taxed as company cars.
There will be no transitional arrangements, and the rules will apply retrospectively to any cars still under contract at that time. This could create a sudden and significant tax burden for businesses and employees still operating petrol or diesel ECO schemes.
What qualifies as a "contrived" scheme?
HMRC will assess whether an ECO arrangement, although appearing to grant vehicle ownership, operates in practice like a company car scheme. Indicators of a "contrived" setup include:
- The employee assumes little or no financial risk.
- Guaranteed buyback terms are offered.
- Limited evidence of genuine ownership.
- Tax savings that are disproportionate to the commercial structure.
If a scheme is classified as "contrived," all tax reliefs will be withdrawn, regardless of previous compliance.
Why this matters
The absence of a grace period, combined with retrospective application, means that businesses must review and potentially adjust existing ECO contracts before October 2026. Failure to do so could result in considerable financial and legal consequences.
Employers may need to:
- Buy back or restructure current contracts.
- Review communications with employees.
- Explore alternative, compliant vehicle schemes.
What are the alternatives?
These changes are likely to accelerate the shift towards electric vehicle (EV) salary sacrifice schemes and low-emission company car options. Benefits include:
- Low Benefit-in-Kind (BiK) tax rates.
- Cost savings for employers and employees.
- Alignment with environmental and net-zero strategies.
Unlike ICE-based ECO schemes, EV-focused arrangements are supported by HMRC and expected to remain stable.
Draft legislation consultation open.
The draft rules were open for consultation up until 15 September 2025, during which businesses, fleet providers, and other stakeholders were able to review the proposals and submit their input. This provided an opportunity to influence the final legislation and ensure practical concerns were considered.
For further information or to view the draft documents, visit: