Electric cars – an overview of the tax position

In this blog, we discuss the reasons why a switch to a company owned electric vehicle may now be a very good option.

There are good reasons why a switch to a company owned electric vehicle may now be a very good option:

  • The tax payable by the driver of the vehicle is very low
  • The company could get tax relief on the whole of the cost of the vehicle in the year of purchase

We summarise the key aspects of each point below. Note that this guidance applies to cars that are completely electric, with differing rules applying to hybrids not covered here.

  • Tax for the driver of the car

The provision of a car by a company (whether owned or leased by the employer) to an employee is taxed on that individual as a benefit in kind. For traditionally powered cars the benefit in kind is calculated by multiplying the list price of the car by a percentage determined by the CO2 emission levels of the car. The outcome of this is often a very high tax charge and is the reason why many owner managers in particular have avoided company owned cars.

However, for electric cars, the list price of the car is multiplied by just 2% for the tax year 2022-23. The driver then pays tax on that calculated amount at their own tax rate.

So, for example, if a company makes available to an employee an electric car with a list price of £50,000 then the benefit in kind is just £1,000. Even if that individual is a higher rate tax payer they would pay tax of just £400 a year.

Note that the 2% benefit in kind value applies irrespective of whether the electric car is new or old.

This makes electric cars a very tax efficient option for the driver of the vehicle.

  • Tax relief for the employer company

Assets purchased by a company attract tax relief as capital allowances. Whilst most cars get tax relief at only 6% or 18% of their cost in the year of purchase a new electric car usually gets 100% of the cost as a tax deduction in the year of purchase.

So, in the example above of the purchase of an electric car with a cost of £50,000, the company's taxable profit would be reduced by that amount for the year the car was purchased, saving £9,500 from the next corporation tax payment (based on the current 19% tax rate).

Note that this excellent tax relief is only available if the car is new and unused and is purchased rather than leased. Finance such as hire purchase can be taken out on the car and the tax relief will still be available.

If the car is leased then corporation tax relief is received on the lease payments made in the accounting period (note that only 50% of the VAT on the lease payments can be claimed when the vehicle is available for private use).

Other considerations

  • Tax relief is available to the employer for installing a charging point at the workplace
  • The employee will pay no tax on the provision of electricity at the workplace even if that charge is used for private mileage
  • The rules for electric vans are similar to those for cars. However, the benefit in kind charge on the employee is actually zero, meaning they have no tax to pay irrespective of the use of the van

These rules on electric vehicles are expected to be in place until at least 2025. There are no guarantees beyond then that these great tax breaks will remain in place, so if an employer is wanting to take advantage of them then there may not be a better time.

If you would like to discuss this in more detail then please get in touch with our team on;

01484 541155

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