For a number of years the UK Government has attempted to encourage business users towards using low emission vehicles. What is the benefit of using a fully electric vehicle as a company car?

Background

Benefit in Kind (BIK) tax on company cars has for many years been based on the list price of the vehicle, multiplied by a % based on the CO2 emissions of the vehicle, to arrive at a ‘cash equivalent’ value.

The user pays income tax (20% or 40% based on their earnings) and the employer pays Class 1A NIC (currently 13.8%) on the ‘cash equivalent’ value.

Example Per Annum Cost (2023/24)

2023 Volkswagen Golf 1.5 TSI Style 130PS
List Price = £29,130
CO2 Emissions = 124 g/km (29%)

Cash Equivalent is £29,130 x 29% = £8,447.70

Tax at 20% = £1,689.54
Tax at 40% = £3,379.08

Cost to Employer (Class 1A NIC) = £1,165.78

If the employer purchased this vehicle they would only be able to claim Special Rate Capital Allowances (6% per annum) for tax purposes on the cost of the vehicle as CO2 emissions exceed 50 g/km.

In most cases company cars are simply not worth the cost when factoring in the BIK tax and national insurance. This includes many hybrid vehicles.

Electric Vehicles

Benefit in Kind tax is calculated in the same way (List Price x Emissions Rate = Cash Equivalent) however the emissions rate for fully electric vehicles is only 2% and will be until 5th April 2025, after which it is planned to rise to 3%, gradually rising to 5% by 2027/28. Clearly a huge difference between the 29% rate on the example above.

Another huge benefit for employers and business owners is that if they purchase a new electric vehicle, they can deduct 100% of the cost for tax purposes, even if the car is purchased on finance. Second hand electric vehicles would currently be eligible for main rate capital allowances (currently 18%).

Fuel Benefit

Company car users who have private fuel paid by their employer pay tax on a fixed sum of £27,800 in 2023/24 (20% / 40%). Employers also pay Class 1A NIC (13.8%). This is rarely cost effective given the large amounts of tax (£5,560 – £11,120).

Electric is not classed as fuel so there is no BIK for the provision of electricity to charge a fully electric vehicle at work.

Summary

There are potentially tremendous tax reliefs available for using electric vehicles, especially for business owners who can save corporation tax on the cost.

This article focuses on the BIK tax of cars, there are different rules for vans and commercial vehicles.

Data correct as of the 2023/24 tax year. This article is to be used as a guide only, it is important to always take specific advice based on your personal circumstances before purchasing a vehicle. Feel free to contact us if you have any questions.

Author – Ryan Sample ryan@sapphireaccountants.co.uk