Understanding Electric Car Tax

In this blog, we explore the rising popularity of electric cars and examine whether the tax benefits associated with them make these vehicles a worthwhile investment for businesses.

Company Car Schemes

Employees often opt out of company car schemes that offer petrol or diesel cars, as it adds to their own personal tax burden. They want to avoid paying benefit in kind tax, which is based on the vehicle’s monetary values and emissions. It is often more cost-effective to use their own vehicle and claim mileage reimbursement. Similarly, business owners may prefer to draw dividends rather than purchase a car through the business due to tax efficiency.

Consequently, the current company car tax rules make petrol or diesel vehicles less attractive, causing businesses to miss out on taxable benefits such as capital allowance reliefs.

Benefit in Kind Rates for Electric Cars

The introduction of electric cars has prompted employees and businesses to reconsider their options. The government can set Benefits in Kind rates to encourage employers and company car drivers to choose vehicles with lower emissions such as fully electric cars or plug-in hybrids. Due to their zero emissions, electric cars benefit from significantly lower benefit in kind rates and offer substantial tax reliefs to companies purchasing them.

The benefit in kind rate for a fully electric car is just 2%, and this rate is set to remain unchanged for the 2024/25 tax years. Whereas, the benefit in kind rate for the most polluting petrol or diesel cars can reach as high as 37%. For the full benefit in kind rates for company vehicles, visit the HMRC website.

Calculating Company Car Tax for Businesses

Every company vehicle has a benefit in kind value based on the car’s value (including VAT, optional extras, and delivery fees) plus its CO2 emissions. Companies must pay Class 1A Employers National Insurance at a rate of 13.8% for 2025/25, on the benefit in kind value (this is subject to change). This is reported annually on a P11D form, due on July 6th for the previous tax year. Additionally, businesses must declare this figure to HMRC on a P46 (Car) form each year.

Employee Tax Liability

An employee’s tax liability is determined by the benefit in kind rate of the vehicle, its benefit in kind value, and the employee’s income tax bracket.

Available Company Car Tax Reliefs

Company cars do not qualify for the annual investment allowance (AIA), however, the acquisition cost of a commercial vehicle is allowable. Businesses need to ascertain whether a vehicle qualifies as a commercial vehicle, with an AIA cap of £200,000 for purchases made from January 1st 2022.

If purchasing rather than leasing vehicles, businesses may qualify for a 100% first-year allowance (FYA). To be eligible, the vehicle’s CO2 emissions must not exceed 0g/km, and the cars must be brand new (as per section 45D of the Capital Allowances Act 2001). This provides full corporate tax relief on the vehicle’s cost in the purchase year, equating to a tax relief saving of £6,650 – £8,750 on a £35,000 electric car, depending on the level of companies taxable profit.

Additional Benefits of Zero Emissions Vehicles

Zero emissions vehicles offer numerous advantages, including reduced road tax, exemption from London’s Ultra Low Emission Zone (ULEZ) and congestion charges, and eligibility for a plug-in grant of up to £1,500 for electric cars and £5,000 for vans.

Considerations Before Acquiring Electric Cars

Before investing in electric cars for your business, it is crucial to evaluate the costs and practicalities. Electric vehicles generally have higher upfront costs compared to petrol or diesel models, which should be considered in your financial calculations.

While the UK’s charging infrastructure is rapidly improving, assess the availability of charging facilities near your home, business, clients, and employees. Additionally, for employees with high annual mileage, the limited range of some electric cars may be a concern.

Get further advice

For expert advice on electric car tax and to optimise your business’s tax strategy, contact The Smart Accountants, your go-to source for smart, real-time online accounting, tax and bookkeeping services.