What tax incentives are there for electric company cars?

What tax incentives are there for electric company cars?
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    Disclaimer: This article is based on legislation which was correct at time of publishing on February 28, 2023
    This page was last updated on September 21, 2023

    Now is the perfect opportunity for a business to adopt a green vehicle fleet. This is because employers are eligible for higher tax deductions on costs, while employees are taxed at lower rates on the benefit received. It’s an ideal win-win situation for companies looking to reduce their carbon footprint and provide cost-effective benefits to their employees.

    To further efforts towards a ‘Net Zero’ Great Britain, HMRC is promoting the purchase and ownership of electric vehicles by offering higher tax relief, not available for standard petrol or diesel cars. This incentive can be in the form of Corporation Tax and increased Capital Allowances or lower Benefits in Kind and National Insurance.

    There are numerous benefits to choosing an electric car or zero-emission van, which makes it a worthwhile investment for businesses looking to reduce their carbon footprint. At Butt Miller, our clients are very carbon-conscious and are intrigued to know how they reduce their carbon footprint whilst making great tax savings too. Find out more by reading our article below.

    How is an electric company car taxed?

    If an electric company car is used for business journeys only, you will not need to pay company car tax. However, if company electric vehicles are available for personal use, a benefit in kind will arise. This effectively adds additional income to your taxable pay.

    A further attraction for a business is that zero-emission vehicles incur no road tax.

    Does a benefit in kind arise from having a charging facility installed?

    Where an employee has a dedicated charge point installed at their home by the employer, there is no taxable benefit where the employee has a company car. However, a benefit in kind will arise if this charging point is used to charge their own personal electric vehicle.

    There is no taxable benefit when a business installs charging points at or near the workplace and allows employees to charge their vehicles at work, regardless of the level of private usage.

    What is a benefit in kind?

    A benefit in kind is any non-cash benefit that is provided to an employee. The value of the benefit is converted to a notional income value to be added to earnings.

    Benefits should be reported to HMRC via a P11d where there aren’t any arrangements to tax the benefit as income through the payroll.

    A benefit in kind (BIK) will arise on an electric car purchased by the employer which is available to an employee or director for personal use. To calculate company car tax, the published list price of the car is multiplied by the appropriate BIK tax rate, which is determined by the CO2 emissions and the electric only range of the car.

    For 2022/23 to 2024/2025, the appropriate percentage for fully electric vehicles with zero CO2 emissions is 2%.

    For example, an electric car with a list price of £50,000 will give rise to a benefit of £1,000 (£50,000 x 2%). Note that the list price is not the same as the cost of the car to the company. The £1,000 BIK is treated as taxable income received for the individual who is using the car, attracting tax at income tax rates of 20%, 40% or 45%, depending on the income tax bracket that the individual falls into.

    The company pays Class 1A National Insurance on the taxable benefit, currently at 14.53% for 2022/23, going back down to 13.8% from April 2023. Using the example above, the company would pay £145.30 NIC, which is also an allowable deduction for Corporation Tax.

    The BIK rate on petrol and diesel cars can be as much as 37%, making fully electric and plug-in hybrids very tax efficient for employers.

    What Government EV charging grants are there?

    The UK Government offers EV charging grants for people looking to go electric. Of note, the EV infrastructure grant for staff and fleets applies to small-to-medium-sized businesses in the UK with no more than 249 employees.

    How does the grant work?

    The grant covers up to 75% of the cost of the installation of the infrastructure needed for the electric charging points, plus any costs of charging facilities that are installed.

    The company can get £350 per charge point socket and £500 per parking space enabled with supporting infrastructure, with the total grant being limited to £15,000.

    Rather than receiving government grants by way of physical cash, the grant is instead deducted from the installation cost by way of a discount. The grants can easily be applied for through the HMRC website.

    Is it worth buying an electric car through my company?

    In recent years people have been discouraged from purchasing cars through their company as historically, the company car comes with large tax bills. Now, with the government’s push on pure electric cars and hybrid vehicles, there are many tax advantages that encourage business owners to purchase low-emission cars and vehicles.

    In addition to this, government grants offer financial support and ease the burden on companies wishing to become more environmentally friendly in an expensive market.

    Green Car – case study

    Scott called the tax team recently as he wanted to get a new electric vehicle through his company.

    Given the monthly lease costs he had been quoted, we were able to calculate the cost to the company would be £34,000 after the Corporation Tax relief that could be claimed, and the personal tax on the benefit in kind was minimal.

    Scott was a little disappointed in our figures because he had heard in his trade that electric cars were “virtually free”. We worked out that his network was thinking along the right lines when we applied the calculations to buying the car outright.

    We projected that the same car bought outright, rather than leased, would cost around £17,000 over 4 years, which is a very attractive saving.

    Can I claim for charging my electric company car at home?

    Employees can claim for charging their company owned fully electric and electric hybrids at home using HMRC’s Advisory Electricity Rate (AER), which currently stands at 8p per mile.

    The problem with the AER is that it is universal and applies to all electric vehicles regardless of size and efficiency. This means that for larger and less efficient electric vehicles, the AER may not cover the charging costs and ultimately leave employees shortchanged. For context, a typical car with an electric range of 200 miles can cost anywhere between £15 and £20 to charge.

    Finding alternatives to the AER can be complicated as reimbursements of domestic electricity can cause employees to incur BIK tax. Fortunately, some of the newer charging facilities on the market can record the specific usage and allow for more accurate charging cost claims, which is especially beneficial in today’s climate of rising energy bills.


    Are there tax benefits to leasing an electric car through the company?

    Leasing low-emission vehicles may be an attractive option for companies that do not have substantial amounts of capital to invest or don’t want to take on the responsibility for maintaining a vehicle.

    The monthly rental costs of the vehicle are allowable deductions for Corporation tax purposes.

    It is worth noting that only 50% of the VAT can be reclaimed on the monthly lease payments if the car is available for private use. If the car is not available for private use, then 100% of the VAT can be reclaimed.

    A benefit in kind will still arise on electric cars if there is personal use, despite the fact that the electric car is not owned outright by the company.

    Do electric cars qualify for capital allowances?

    A company can claim First Year Allowances (FYA), allowing for 100% of the cost of company-owned electric cars as a tax deduction for Corporation Tax. The key point here is that the car is new and unused before the purchase qualifies for 100% FYA.

    A second-hand electric car only attracts allowances of 18% of the full cost for Corporation Tax in the first year, followed by subsequent 18% deductions in future years until the cost of the car has been used up.

    What’s the difference for non-electric cars?

    Petrol and diesel cars with CO2 emissions of 50g/km or less also qualify for the 18% Main Rate Allowances deduction.

    However, cars with CO2 emissions that are over 50g/km are only eligible for an allowable deduction of 6% of the cost of the car for Corporation Tax, followed by subsequent 6% deductions in future years.

    Do electric vans also qualify for the same allowances?

    At the moment, all commercial vehicles already qualify for 100% tax relief through Annual Investment Allowance (AIA), regardless of whether they have zero emissions.

    To find out more about how your business can benefit from battery-electric vehicles, contact us today.

    See also how carpooling works for businesses here.

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