Should your next company car be electric? Thinking about the tax implications

As environmental concern grows in the business world, electric vehicles (EVs) are becoming a popular choice when it comes to company cars.

This transition is primarily about protecting the world. However, there are also substantial tax breaks available for those companies that pick electric vehicles for their company cars. So, if you are on the fence about whether an electric car is right for your company or not, keep reading.

The tax implications in buying an electric vehicle for your company

In its effort to secure a cleaner, safer, future for us all, the government has changed the tax landscape to encourage electric vehicles over petrol and diesel. This was accomplished through the Benefit-in-Kind (BIK) Tax, which applies to corporate vehicles.

BIK is effectively a tax on the advantage of owning a corporate automobile that may be utilised privately. The amount of BIK Tax you pay is determined by various factors, including the car’s worth and environmental effect, which is quantified in CO2 emissions.

Which factors influence the BIK tax?

• The car’s worth (P11D value): The car’s list price, including VAT and any extras, serves as the starting point for BIK Tax computation.
• Environmental Impact: Electric vehicles, which emit no CO2, have a substantially lower BIK rate than petrol or diesel vehicles.
• The taxable value is calculated by multiplying the car’s P11D value by the current BIK rate of two percent for EVs.

For example, a £30,000 electric car generates £600 of BIK tax (£30,000 x 0.02).

The BIK rates for electric vehicles are expected to rise somewhat in the future years (to 5% by 2027 / 2028) but it will stay cheaper than those for conventional vehicles.

What are the main benefits of electric company cars?

Salary sacrifice plans improve tax efficiency

The Electric Vehicle Salary Sacrifice Scheme is one enticing option for acquiring an electric corporate automobile.

Employees agree to give up a percentage of their pre-tax compensation in return for a non-monetary reward, such as an electric corporate car.

The beauty of this system is its tax efficiency.

Because the sacrifice is paid with pre-tax compensation, it reduces the employee’s taxable income, resulting in less Income Tax and National Insurance Contributions (NICs) for both the employee and the employer.

Lower benefit-in-kind rates for electric vehicles

BIK rates for electric vehicles are significantly cheaper than for regular petrol or diesel cars. Because of the significant tax benefits, EVs are especially tempting in salary sacrifice programmes.

Currently, the BIK rate for pure electric cars is 2%, which is expected to stay consistent until the 2024-2025 tax year. This is much lower than the BIK rates for petrol and diesel cars, which may reach up to 37%.

Corporation Tax deduction on leased electric vehicles

Leasing electric vehicles is advantageous for companies.

The lease payments are tax deductible as a business cost, lowering the company’s taxable income and, consequently, its Corporation Tax obligation.

This, along with the low BIK rates, makes EVs an economically sound solution for enterprises.

Should you Lease or buy your company’s new electric vehicle?

The tax ramifications of leasing vs owning an electric vehicle vary.

Leasing an electric vehicle allows businesses to deduct lease payments as business costs. However, if a corporation gets an EV, particularly one with low CO2 emissions, it may claim a 100% first-year allowance, allowing them to deduct the whole cost from their income before taxes in the year of purchase.

Individuals who lease an EV do not qualify for a tax deduction since the lease payments are considered personal expenses. However, if the EV is operated as a corporate vehicle, the individual benefits from cheaper BIK costs.

Claiming mileage on rented electric vehicles

Business miles in a corporate electric car can still be claimed, provided the trip is for business purposes.

The HM Revenue & Customs (HMRC) authorised rate is 45p for the first 10,000 miles and 25p thereafter.

It is vital to remember that this does not include travel between home and a regular work location, which is considered commuting and hence not claimable.

Will electric vehicles remain a sensible choice from the tax perspective?

Looking ahead, BIK rates for electric vehicles will gradually rise: 3% in 2025/26, 4% in 2026/27, and 5% in 2027/28.

Despite these increases, these rates are still much cheaper than those for regular petrol or diesel vehicles.

Tax implications for hybrid corporate cars.

Hybrid cars, which combine an internal combustion engine and an electric motor, provide a middle ground.

Their BIK rates are often greater than those of pure EVs because of their dependency on fossil fuels.

The rates for hybrids are decided by their CO2 emissions, with plug-in hybrids (PHEVs) often receiving lower BIK rates.

If you are not yet ready to make the whole transition to electric, they may be able to provide you and your staff with a useful bridge.

Electric company cars: the JW Hinks perspective

The transition to electric company cars is both an environmentally responsible and financially prudent option.

As we move towards a greener future, knowing the tax consequences outlined above is critical for making educated decisions regarding your company’s vehicle options.

Having said that, it is always a good idea to obtain advice from an experienced accountant to help you negotiate the complexities of your position.

With the correct advice, you could find that buying an electric company car has a significant positive impact on both your annual tax bill and the environment.

If you would like to discuss the implications of purchasing and running an electric company car for your business, then give JW Hinks a call on 0121 456 0190. Our friendly and professional team will make sure you have all the information necessary to make a decision that is right for your business.