So, you want an electric company car? The tax perspective
Environmental consciousness is becoming more and more aligned with business operations, and electric vehicles (EVs) are becoming a popular choice for company cars as a result.
This shift is as much about saving the planet as it is about the significant tax incentives on offer.
Here are our thoughts on the electric company car debate and what we are currently recommending to our clients.
What are the tax implications of electric company cars?
The Government, in its push towards a greener future, has adjusted the tax landscape to favour electric vehicles over petrol and diesel.
This meant a look into the Benefit-in-Kind (BIK) Tax, which applies to company cars.
BIK is essentially a tax on the benefit of having a company car that can be used privately.
The amount of BIK Tax you pay hinges on several factors, including the car’s value and its environmental impact, measured by CO2 emissions.
Key factors influencing BIK Tax
- The car’s value (P11D value): The list price of the car, including VAT and any extras, determines the starting point for BIK Tax calculation.
- Environmental impact: For electric vehicles, which have zero CO2 emissions, the BIK rate is significantly lower compared to petrol or diesel cars.
The taxable value is found by multiplying the car’s P11D value by the BIK rate, currently at two per cent for EVs.
For example, a £30,000 electric car incurs a taxable benefit of £600 (£30,000 x 0.02).
The BIK rates for electric vehicles are set to increase slightly in the coming years but will remain lower than those for traditional cars.
By 2027/28, the rate for EVs will be five per cent.
Advantages of electric company cars
We advise our clients that there are generally three key advantages to electric company cars.
Tax efficiency through salary sacrifice schemes
One attractive route for obtaining an electric company car is through the Electric Vehicle Salary Sacrifice Scheme.
Here, employees agree to forgo a portion of their pre-tax salary in exchange for a non-cash benefit, like an electric company car.
The beauty of this arrangement lies in its tax efficiency.
Since the sacrifice is made from pre-tax salary, it lowers the employee’s taxable income, leading to reduced Income Tax and National Insurance Contributions (NICs) for both the employee and employer.
Lower benefit-in-kind rates for EVs
The BIK rates for electric vehicles are considerably lower compared to traditional petrol or diesel cars.
This makes EVs particularly appealing in salary sacrifice schemes due to the substantial tax savings.
As of now, the BIK rate for pure electric vehicles is a mere two per cent, a figure set to remain stable until the 2024-2025 tax year.
This is significantly lower than the BIK rates for petrol and diesel vehicles, which can climb up to 37 per cent.
Corporation Tax relief on leased electric cars
For businesses, leasing electric cars offers an added perk.
The lease payments are tax-deductible as a business expense, reducing the company’s taxable income and, in turn, its Corporation Tax bill.
This, coupled with the low BIK rates, positions EVs as a financially savvy choice for businesses.
Leasing vs purchasing an EV
The choice between leasing and purchasing an EV carries different tax implications.
For businesses, leasing an EV means the lease payments are deductible business expenses.
However, if a business purchases an EV, particularly one with low CO2 emissions, it can claim a 100 per cent first-year allowance, allowing the deduction of the full cost from their profits before tax in the year of purchase.
For individuals, leasing an EV doesn’t offer a tax deduction for the lease payments as these are personal expenses.
But, if the EV is used as a company car, the individual benefits from the lower BIK rates.
Claiming mileage on leased electric cars
Business mileage in a company electric car can be claimed, assuming the travel is for business purposes.
The HM Revenue & Customs (HMRC) approved rate stands at 45p for the first 10,000 miles and 25p thereafter.
It’s important to note that this does not cover travel between home and a regular work location, as this is considered commuting and is not claimable.
Future outlook: BIK rates and EV adoption
Looking ahead, the BIK rates for electric cars will undergo a gradual increase – three per cent in 2025/26, four per cent in 2026/27, and five per cent in 2027/28.
Despite these increases, these rates remain significantly lower than those for conventional petrol or diesel cars.
Tax perspective on hybrid company cars
Hybrid vehicles, combining an internal combustion engine with an electric motor, offer a middle ground.
Their BIK rates are typically higher than those for pure EVs due to their reliance on fossil fuels.
The rates for hybrids are determined based on their CO2 emissions, with plug-in hybrids (PHEVs) usually enjoying more favourable BIK rates due to their lower emissions.
They could offer you and your employees a nice stepping stone if you are not quite ready to make the jump to fully electric.
Our thoughts on the electric car debate
The move towards electric company cars is an environmental statement about your business and a financially astute decision.
As we embrace a greener future, understanding the tax implications mentioned above is crucial for making informed decisions about your company’s vehicle choices.
Having said all this, it’s always wise to seek tailored advice from an experienced accountant to navigate the specifics of your situation.
With the right knowledge, opting for an electric company car could be a smart move for both the planet and your pocket.
To find out if electric company cars are right for you, please get in touch with one of our team.
