Buy electric vehicles (and save tax)
Electric cars will help you reduce your environmental impact, benefit from lower running costs, and save you both personal and corporation tax. The most well-known electric car – Tesla, has four models available now making it a great option for business owners and employees looking to swap their petrol and diesel cars for zero-emission vehicles.
Why an electric car saves tax
- Provided the fully electric car is brand new, it will qualify for Enhanced Capital Allowances on an outright purchase or hire purchase.
- If purchased outright, the first-year allowance allows the company to deduct the full purchase price from profits before tax. This is in addition to the normal Annual Investment Allowance.
- If the electric car is purchased through a lease and the Co2 is under the threshold of 50g/km, you can deduct the full monthly lease cost from the company’s profit and loss account statement.
- Provided you are registered for VAT, you can potentially reclaim VAT on lease payments for your electric vehicle when you put your car through your company. You can claim 100% if the car is for 100% business use only and not available for private use. 50% VAT is reclaimable if used for personal use.
- If you buy the car, you can claim 100% VAT if it’s only used for business miles and not available for personal use at all.
- The installation of a charge point at work also qualifies for the first-year allowance and you can claim tax relief of 100% in the year these costs were incurred.
Why electric cars reduce costs
- No London Congestion Charge.
- No Road Tax.
- No Fuel Benefit to pay if it is a fully electric car.
- The cost of fuel is also considerably lower, as the car plugs into the many free chargers dotted around the country. Alternatively, you can recharge by plugging it in at home.
- The company can either pay for the insurance, car tax, servicing and maintenance or reimburse an employee for these expenses.
Benefits of offering electric vehicles to your employees
- If the car is an ultra-low emission vehicle (<50g/km) it can be provided to your employees using a salary sacrifice scheme. The money is taken from the employee’s salary before tax and national insurance is worked out. This will mean income tax and national insurance are lower due to the sacrifice. Fully electric cars on a salary sacrifice scheme are taxed per the normal Benefit in Kind rules.
- The Benefit in Kind tax is 2% for 2022/23 based on the EV's taxable value, which is applied to the list price of the car. This is expected to remain at 2% until 2024/25. The individual will pay income tax on this value and the company will pay the national insurance, which for 2022/23 is 14.53%.
- The Benefit in Kind tax (BIK) for hybrid vehicles will depend on the car's zero-emission mileage.
- There isn’t any taxable benefit for the employee if they charge their electric car at work.
- The employee can reclaim the electricity at 5p per mile for business mileage in company cars when charging at home or at a public charging point only. The charging station usually provides a receipt for the amount spent.
The tax impact: An example
A company purchases a fully electric car for £50,000 including VAT. A basic rate taxpayer director will use this as a company car, including personal trips.
- Corporation tax savings of £9,500 (£50,000 @ 19%)
- VAT reclaim of £4,167
- Benefit in Kind of £1,000 (£50,000 @ 2%) taxed as below
- Personal tax liability of £200 (£1,000 @ 20%)
- National insurance liability of £138 (£1,000 @ 13.8%)
Salary Sacrifice when buying an electric car
- If the car is an ultra-low emission vehicle (<50g/km) it can be provided to your employees using a salary sacrifice scheme. The scheme offers everything required such as car, charger, energy, insurance, servicing, maintenance, breakdown and tyres.
- The car payment is deducted from the employee’s salary before tax and national insurance which reduces the taxable earnings and results in tax and national insurance savings.
- The arrangement cannot reduce an employee’s cash earnings below the National Minimum Wage and is therefore, often not beneficial for Directors on low salaries.
- A company car that an employee received via a Salary sacrifice scheme is taxed under normal Benefit in Kind (BIK) rules. The rate for 2022/23 is 2% based on the car’s list price. Employees will pay income tax on the BIK amount, whilst the company will pay the national insurance at a rate of 13.8%.
- Employee contracts should be updated to reflect the agreement to sacrifice salary as part of the scheme.
- The employee’s gross salary shown as taxable income on their P60 will be the amount after salary sacrifice deductions.
- The salary sacrifice deductions reduce adjusted net income for tax purposes which can be useful for tax planning, for example, to recover lost personal allowances or bring taxable income below certain thresholds.
- Employees can charge their electric cars at work without giving rise to a taxable benefit. The employee can also reclaim the electricity at 5p per business mile in company cars when charging at home or in public.
- Some schemes provide an all-inclusive package which covers all costs to get you on the road, including insurance, road tax, servicing and maintenance.
- May face scheme set up fees.
- Insurance providers are very selective, and it can be hard to source for electric vehicles.
- If an employee changes their mind, they cannot hand the car back early.
- An employer may be exposed to leaver risk, although some schemes offer protection.
Salary Sacrifice: An example
A higher-rate taxpayer director with a salary of £80,000 purchases a fully electric car with a value of £30,000 via a 36-month salary sacrifice scheme with agreed monthly payments of £833. The car will be used as a company car, including personal trips.
- Monthly deductions of £833.3
- Adjusted net income reduced from £80,000 to £70,000 (shown on P60)
- Annual Income tax savings of £4,000 (£10,000 @ 40%)
- Annual National Insurance savings of £200 (£10,000 @2%)
- Benefit in Kind of £600 (£30,000 @ 2%) taxed as below
- Personal tax liability of £240 (£600 @ 40%)
So, how much tax would you save?
How much tax you’ll save would vary depending on your personal circumstances, but hopefully the above has provided a good starting point. If you’d like us to work out exactly how much tax you’d save if you purchased or leased an electric car, please get in touch. We will be able to provide you with professional advice on:
- Car calculations based on hire purchase, finance lease, and operating lease so you can make a decision on what the best option is for you
- Any corporation tax savings and VAT implications
- Any personal implications and what the tax benefits are
- What are the national insurance contributions implications for the company
- Linking any calculations with your current salary and dividend tax whether you are a basic rate taxpayer or if you pay higher rate income taxes
Additional reasons why you should buy an electric car for your business
As the Government heads towards a net zero goal, all vehicles (including heavy-goods vehicles / HGVs) must be fossil fuel free by 2050. It's also worth considering that:
- One of the biggest benefits of electric cars is that they're cheaper to run than petrol or diesel cars. Electricity is cheaper, so it costs less to charge an electric car than it does to fill up a gas tank.
- Electric cars also have lower maintenance costs than petrol or diesel cars. Since electric cars have fewer moving parts, there are fewer things that can break or wear out over time. Additionally, electric cars don't require tune-ups and oil changes as often as petrol and diesel cars do.
- Transport is the largest emitting sector of greenhouse gas emissions in the UK, producing 24% of the UK's total emissions in 2020. Switching to an electric car can help reduce your business's environmental impact and help you do your part to protect the planet.
- EV battery technology is ever-improving, so shorter charging times and the ability to travel further means electric vehicles are becoming more accessible. Autocar states that even relatively affordable EVs priced around £35,000 are able to run for over 200 miles even with an 80 per cent charge.
- They are fun to drive. Electric cars have instant torque, so they accelerate quickly and smoothly. They also provide a more comfortable riding experience because of their silent operation.
Electric cars are becoming more popular every day as people realise their many benefits. If you're thinking about buying an electric car for your company, you can't go wrong - you'll save money, help the environment, and have a lot of fun driving your new car!
Any questions about buying an electric car for your business?
If you have any questions about buying an electric company car or would like to calculate how much tax you could save on your new car, fill in the form below and we’ll pop you through more information on the tax implications of going for a low or zero-emissions vehicle.
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