Over recent years, the government have become increasingly driven to encourage the uptake of electric cars. This has been evident in the announcement of over £20 million to be invested in various schemes to facilitate the transition towards more electric vehicles on the road as well as the phasing out of sales of all new petrol and diesel cars by 2030. Now more than ever there are serious financial incentives to buying an electric car through your company.
Over half of all cars on the road in the UK are registered to businesses. As technology develops, mileage range of new electric cars are getting close to 300 miles and become capable of dealing with most business driving needs. As part of deciding whether to buy an electric car, you may want to consider the tax benefits currently on offer when purchasing through a company.
Is there an electric car grant available?
Since 2011, the plug-in car grant (PICG) which is also known as the electric car grant has been available to those buying eligible electric cars, vans, and motorcycles. It was originally intended to subsidise the price of expensive new electric cars to bring them more in line with the cost of new petrol or diesel cars. However, over time, the generosity of the grant has gradually reduced due to the increased availability of more affordable options.
From March 2021, the government electric car grant offers £2,500 towards the cost of an eligible plug-in vehicle where it costs no more than £35,000. To be eligible the vehicle must have an electric range of at least 70 miles. If you are buying an eligible electric vehicle through your company, then you do not need to do anything to apply for the electric car grant. The car dealer will apply on your behalf, and you will receive the grant automatically by way of a discount on the price. The grant will be available until 2023, however it has not yet been confirmed whether more deductions will be made to the amount over the next couple of years.
What is the capital allowance rate for electric cars?
If you buy an electric vehicle through your company, you will be able to claim the cost of it as capital allowance. Claiming capital allowance means the value of the asset purchased for your business will be deductible from your profits before corporation tax is calculated. Usually, cars do not qualify for the Annual Investment Allowance (AIA) which is an allowance that enables 100% of the cost to be deductible from profits. Instead, cars can qualify for ‘writing down allowance’ which means that part of the value is deductible from profits each year the asset is used for the business until the total value has been deducted.
Electric cars, however, are an exception. From 1 April 2021, pure zero-emission cars can qualify for 100% first year allowance if the car is purchased new and unused. This means that the entire cost of the electric car is deductible from profits before tax (with no caps limiting the value of the vehicle to be eligible for this allowance). The first year allowance is another type of capital allowance and is generally applicable to plant and machinery, as well as energy-saving equipment. Commercial vehicles already qualified for 100% relief under AIA.
Furthermore, since 1 April 2021, a new super-deduction was introduced. This type of capital allowance enables qualifying plant and machinery to receive a 130% deduction from profits before tax. The super-deduction can be claimed if you invest in an electric vehicle charging point for your business; however, it will only be available until 31 March 2023.
Can you claim back VAT on electric cars?
The usual rules apply when it comes to claiming back VAT payments on cars purchased through a company, regardless of whether it is electric or fuel-run. The only time you can claim back VAT is when the car is solely being used for business purposes and has no personal usage. HMRC are often sceptical of this claim, so ensure that you have sufficient evidence if this is the case.
In comparison, were you to lease and not purchase an electric car instead through your company, you would be able to reclaim 50% of the VAT from the lease payments, even where there is some personal use. Where the leased electric car is exclusively used for business, 100% of the VAT can be reclaimed.
If you have purchased an electric van or motorcycle through your company that is solely for business purposes then 100% of the VAT can be recovered. If there is any significant personal use then you will need to adjust for a proportionate amount of VAT to be claimed.
Do you have to pay Vehicle Excise Duty for electric cars?
Vehicle Excise Duty (VED), more commonly known as road tax, is an annual tax charged to drivers and motorcyclists. The tax is collected by the DVLA, a government department that keeps records of all drivers and vehicles on UK roads. Fully electric cars are exempt from paying VED to help support drivers who choose the most environmentally friendly cars and vans. All cars that emit less than 75g/km CO2 will pay less road tax in the first year, delivering additional cash saving for plug-in hybrids on your company’s fleet. You must however still tax your vehicle even if you do not have to pay anything.
Fully electric cars are now also exempt from the ‘expensive car’ supplement. The ‘expensive car’ supplement was previously a charge for more expensive cars, costing over £40,000 but this has now been scrapped for electric cars until 31 March 2025.
What is the benefit-in-kind (BIK) for electric cars?
As when purchasing any car through a company, as soon as the vehicle is used for personal travel, a BIK will arise. Unlike petrol and diesel cars however, electric cars have a much lower BIK tax rate. For the 2021/22 tax year, the BIK rate for all zero-emission vehicles is 1%. This is due to rise to 2% for the 2022/23 tax year, but there are still significant savings to be made when compared to petrol or diesel cars, which can attract a BIK rate of up to 37% depending on their emissions.
Tax on BIKs must be paid by both the company and the employee, therefore be aware that if you are a sole director of your own limited company, you will have tax to pay from your company as well as from through your personal tax return. To calculate how much tax the company will pay for providing an electric car to an employee as a BIK, you will need to use the formula:
P11D value (the value of the electric car) x BIK rate based on CO2 (1% as set out by the government) x 13.8% (the rate of Class 1A National Insurance contribution payable by employers).
Using an example of a Tesla worth £60,000, the company would calculate 1% of this value (£600) and multiply it by 13.8%. The company would pay £82.80 in tax every year the car is available as a BIK to the employee.
To calculate how much tax the employee will need pay as a result of receiving an electric car as a BIK will be dependent again on the P11d value, the BIK rate and the employee’s personal income tax band. You would use the formula:
P11D value (the value of the electric car) x BIK rate based on CO2 (1% as set out by the government) x employee’s income tax rate
Using the same example of a Tesla worth £60,000 the employee would pay the following tax depending on their income tax band:
- Basic rate taxpayer at 20% would pay £120 in tax each year
- Higher rate taxpayer at 40% would pay £240 in tax each year
- Additional rate taxpayer at 45% would pay £270 in tax each year
Can I buy an electric car on salary sacrifice?
Opting to use a salary sacrifice scheme can be a cost-effective way to switch to an electric car, with tax savings for both the company and employee. Salary sacrifice enables an employee to exchange part of their salary for a non-cash benefit supplied by the company instead. In this case, taking a lower salary for exchange of an electric vehicle.
Once a salary sacrifice scheme has been entered into, a single monthly payment that covers leasing, maintenance and insurance is taken directly from the employee’s salary before income tax and national insurance contributions are deducted. Whilst this means the employee saves on income tax and national insurance, it also means the company has less national insurance to pay also.
For help to correctly declare buying an electric car through your company and reporting the right amount of taxes due, please contact us using the form below to find out more about our company tax return service and payroll services.