A growing number of businesses are considering moving to electric company cars, but what are the tax benefits?
Many employers offer company cars to their employees, especially if their vehicles are required for work. For some businesses, moving to electric vehicles is an important part of their commitment to sustainability and the move to net carbon zero.
It is important to consider the potential tax benefits of electric, diesel or petrol before deciding what type of car the company should purchase.
When does a benefit-in-kind (BIK) arise?
If a company car is used or available for personal reasons, for example, on a trip to the shops or visiting friends, HMRC sees it as a benefit and it will be treated as a BIK, for tax purposes. This has implications for both the employee/director and the company.
BIK charges and company cars
For tax purposes, a company car is treated the same as other BIKs, such as living accommodation or private health insurance. It benefits the employee/director, so:
- Tax must be paid by the individual on the BIK.
- Employer’s National Insurance (NI) on the value of the BIK must be settled by the employer.
These additional charges may mean that owning a petrol or diesel company car through a limited company isn’t beneficial for tax purposes if you are the owner and director. This is because you’ll pay double tax: once as the individual receiving the benefit, and again as the company.
Tax on a company car
The tax charge on a company car is calculated as follows:
- Working out the P11D value by applying a CO2 emission % to the car’s list price.
- Times this P11D value by your income tax rate.
The lower emissions rate is the key reason why electric cars are more tax beneficial than petrol or diesel vehicles. Petrol or diesel cars can attract a CO2 emission of up to 37%. On the other hand, a pure electric car will currently be just 1% (rising to 2% for 2022/23 and 2023/24).
Therefore, on a car list price of £30,000 the P11D value could range as follows:
List price £30,000 £30,000
CO2 emissions % 37% 1%
P11D value £11,100 £300
Tax at 20% £2,200 £60
Tax at 40% £4,400 £120
So, as you can see, a petrol company car isn’t very tax efficient compared to an electric vehicle.
What are the other advantages of providing electric company cars?
Companies are eligible to apply tax relief on the assets they buy and this reduces their corporation tax. This is known as capital allowances and companies can claim a 100% first-year allowance on the electric vehicles, getting full tax relief on the car value. For a non-electric vehicle allowances at 18% / 6% reducing balance each year only are available, meaning it would take at least 7 years to get close to 100% relief for the cost of the vehicle.
This is paid on electric cars at a much-reduced rate of 4p per mile.
Electricity is not ‘fuel’, which means there’s no Class 1A NI charge for the employer.
Tax incentives also exist on the installation and use of charging points.
This is a quick overview of the key considerations before purchasing company cars. To make a fully informed decision it is important that you speak with your accountant to ensure you fully understand the tax implications for your business. Contact me or your usual Westcotts advisor for help.