Residual values & leasing risk

Why many UK fleet TCOs are still wrong (late-2025 update)

If your Whole-Life Cost model for EVs still looks like it did back in March, it’s already out of date. Since April, zero-emission cars have lost their VED exemption, a new Electric Car Grant has been launched with hard price caps, and the ZEV mandate has been loosened in ways that directly influence OEM behaviour. Add in a split Advisory Electric Rate, changing Benefit-in-Kind, volatile used-EV values and still-sticky insurance costs — and lease pricing looks very different from the neat forecasts many fleets are still using.

Here’s what has changed, what most models are missing, and how to stress-test your fleet assumptions this quarter.

1. VED & the Expensive Car Supplement: a structural cost from April

From 1 April 2025, new EVs pay £10 in year one, then £195/year thereafter. Crucially, cars with a list price above £40,000 also attract the Expensive Car Supplement (ECS) of £425/year for years 2–6.

That takes the annual VED+ECS burden up to £620/year — a cost line absent from pre-2025 TCOs.

But note: ECS only applies to EVs first registered on or after 1 April 2025. A Tesla Model Y registered in March 2025 carries no ECS; the same car registered in April does.

Quantified effect (36-month lease example):

• Pre-ECS car: £10 (Y1) + £195 (Y2) + £195 (Y3) = £400 total.

• Post-ECS car: £10 + £620 + £620 = £1,250 total.

  That’s ~£850 more in three years, or ~£24/month on lease costs. Add the fact that buyers in years 4–6 inherit three years of £425 ECS liability — and RVs on >£40k EVs face a double drag.

2. Electric Car Grant: tiers, caps and trim creep

The Electric Car Grant (ECG), launched July 2025, provides:

• £3,750 (Band 1) for the most sustainability-certified EVs

• £1,500 (Band 2) for others

• Only if the RRP ≤ £37,000 (raised to £42,000 for certain family variants from 29 August).

  The pitfall is “trim creep”: a popular option or spec bump pushing RRP over the cap kills eligibility, instantly reducing demand and RV compared with near-identical siblings under the cap.

  Action: lock spec under cap, and record grant band status explicitly in your RV assumptions. Don’t “assume the grant” — prove eligibility per build.

3. Used EV market: stabilising, but not yet stable

Signs are positive: Auto Trader’s Retail Price Index showed its first YoY rise for EVs in two years in August 2025 (+0.4%). Entry prices are firmer, and demand is broadening.

But volatility persists. Depreciation curves for 3–5-year EVs still swing heavily depending on battery performance, mileage, brand strength and cohort oversupply. High-volume nameplates coming off lease in bulk (e.g. Model 3, ID.4) may see sharper RV compression.

Action: segment residual assumptions by cohort (1–3y vs 3–5y), battery type and brand; track live data (CAP hpi, Auto Trader) and adjust disposal timing/reserves accordingly.

4. ZEV mandate flex: OEM behaviour will swing

Targets remain (28% EV share in 2025, 80% by 2030). But April’s reforms let OEMs cover up to 90% of obligations with CO₂ credits, reduce penalties, and even transfer credits asymmetrically between vans and cars (1 car = 0.4 van; 1 van = 2 cars).

The upshot: OEMs gain room to lean on hybrids or juggle credit portfolios. Expect quarter-to-quarter swings in discounting, release cadence and channel strategy as they optimise compliance.

Action: diversify OEM mix, and stress-test RVs against scenarios with 5–10-point swings in BEV discounting.

5. Advisory Electric Rate (AER): 8p vs 14p — more than bookkeeping

Since 1 September 2025, HMRC publishes two EV reimbursement rates: 8p/mile (home charging) and 14p/mile (public charging).

This transparency is useful — but it also creates new RV feedback loops. Drivers relying on public charging face higher per-mile costs and tend to use rapid charging more intensively, which may increase mileage or impact battery/vehicle condition grades.

Action: align allocation with driver charging access (home-capable drivers may not need high-capacity trims), and use telematics to track DC-fast patterns. Reinforce hygiene rules (charging caps, vehicle tiering) to protect RVs.

6. The missing pieces: BiK, allowances, insurance

Many TCO packs still ignore three critical levers:

• Benefit-in-Kind (BiK): EV BiK rises from 2% to 3% in 2025/26, then +1pp annually until 5% in 2027/28. For salary sacrifice or perk cars, this directly changes employee net costs and demand.

• Capital allowances: 100% First-Year Allowances on EVs and charging kit are extended until 31 March 2026 — a major relief for corporate balance sheets.

• Insurance: premiums have started to ease in 2025 but remain higher than ICE for many models. Fleet-level renegotiation is key; ignoring this cost line risks skewing WLC.

7. What your next RV/lease audit must cover

1. Tag cars by registration date — pre/post 1 April 2025 — to model ECS correctly.

2. Validate ECG eligibility per build — lock spec under cap and log grant band.

3. Segment residuals by cohort — use live wholesale/retail data, adjust reserves/timing.

4. Stress-test OEM behaviour under ZEV flex — simulate discount swings and credit transfers.

5. Integrate policy levers — AER split, BiK trajectory, capital allowances, insurance, VAT on charging (5% home vs 20% public).

   In late-2025, EV residuals are shaped as much by policy and fiscal structure as by pure market dynamics. VED+ECS, ECG caps, BiK rises, ZEV flex and AER splits all hardwire risk directly into lease pricing.

   If your fleet’s TCO hasn’t been rebuilt with these post-April inputs, you’re under-pricing risk — and setting yourself up for surprises. The fix is not complicated: respec defensively under caps, diversify OEM exposure, update reimbursement frameworks, and track live RV data.

   In short: the era of “EV premium” assumptions is over. Fleet managers need evidence-based models — or risk being priced by the market, not by their spreadsheets.