Taxation of electric cars

A common question we get asked is whether cars should be put through the business or is it better to hold them personally and claim mileage for business journeys.

As is the case with many accountancy and tax questions, the answer is, it depends.

With a push towards going greener, low and zero emission cars are becoming more available, advanced, and accessible, and with tax advantages, these are becoming increasingly popular.

Benefit in kind

Company cars are classed as a benefit in kind, and this is calculated as a percentage of the list price. From April 2020, fully electric cars were subject to a percentage of 0%. There have also been reductions for hybrid vehicles (based on their electric-only range).

For the 2021-22 tax year, fully electric vehicles were subject to a percentage of 1%, increasing to 2% from April 2022.

Compared with some petrol/ diesel vehicles subject to up to 37%, this offers considerable annual tax savings for the individual and the company.

The following simplified example shows how beneficial going electric can be:

Comparing two vehicles with a list price of £50,000 – one being a diesel and one being fully electric*:

• Diesel vehicle
  Benefit in kind – £50,000 x 37% = £18,500pa
  Income tax payable on this by a higher rate taxpayer – £18,500 x 40% = £7,400
  Class 1A NI payable by the company = £18,500 x 15.05% = £2,784

• Electric vehicle
  Benefit in kind – £50,000 x 2% = £1,000pa
  Income tax payable on this by a higher rate taxpayer – £1,000 x 40% = £400
  Class 1A NI payable by the company = £1,000 x 15.05% = £151

That would be an income tax saving of £7,000 for the individual, and a National Insurance saving of £2,633 for the company for the year.

*Applying 2022-23 rates

HMRC have a handy company car tax calculator which may be useful for exploring your options.

Capital allowances

From a business point of view, for the purchase of new electric and zero-emission cars on or after 1 April 2021, 100% First Year Allowances (FYA) are available, helping reduce taxable profits and therefore tax payable.

In addition to 100% FYA available on qualifying vehicles, when a business installs charging points for electric vehicles up until 31 March 2023, it can claim 100% FYA on these costs. The 130% super-deduction may also be available on charging points, where the conditions are met.

Where a business allows an employee to charge their own electric vehicle at the workplace, there is no taxable benefit in kind to cover the electricity used.

So, although electric cars tend to be more expensive to purchase or lease, the tax savings can be considerable, and as more and more car manufacturers are offering electric cars and the number of charging points is increasing all the time, it is well worth considering going electric.

If you would like to discuss this further, please get in touch with us.