Tax Benefits of Company Electric Cars

Tax Benefits of Company Electric Cars

It is currently very tax efficient for a company to hire or purchase an electric car for an employee to use.

The key current tax savings are as follows:

  • The Benefit in Kind rate is currently only 1% per annum from April 2021 (2021/2021 tax year), increasing to 2% per annum from April 2022
  • By comparison, petrol and diesel cars can give rise to benefit rates between 15% and 37% per annum
  • The company may also benefit from a 100% deduction, saving tax at 19% of cost, and this relief is currently in place until April 2025

Further detail

When considering a tax-efficient company car, we generally need to consider two aspects as follows:

  • Tax relief for the company
  • Taxable Benefit in Kind for the beneficiary
  • Tax Relief for the company

The tax relief within the company varies depending on whether the car is purchased or leased and, if leased, what type of lease.  

If purchased outright, new electric cars are eligible for First Year Allowances (FYAs), which provides full tax relief for the company in the year of purchase. This relief for electric cars is currently in place until April 2025.

For example, if the car’s purchase price was £35,000, the company would get a deduction for the cost in that year, saving Corporation Tax of £6,650 (19% of cost). Please do note when the vehicle is eventually sold there is likely to be a balancing charge leading to some tax charge based on the vehicle market value at the time of disposal.

Any interest element, if any, on the finance of the vehicle can also be claimed through the company each year, saving tax at 19%.

  • Taxable Benefit in Kind for the beneficiary

As you may know, Company Car benefits are broadly calculated based on the CO2 emissions of the vehicle (or electric mileage range for some Hybrids) and the original list price of the vehicle. Broadly speaking, the higher the emissions or price, the higher the benefit in kind.

Currently the Benefit in Kind rate for a 100% electric vehicle is 1% of List Price for 2021/2022 and 2% from April 2022 onwards. Please note that an Hybrid car does emit CO2 and will attract a higher benefit in kind than an electric car and a Fuel propelled car an even higher benefit in kind because it emits more CO2. Consequentially the tax charge increases the higher the CO2 emission of the car.

The benefit is taxable as income (subject to Income Tax) on the beneficiaries, and the company will also pay 13.8% in National Insurance on the benefit.

Example for an electric car:

  • Car List Price of £35,000
  • Benefit in Kind (1%) – £350
  • Income Tax (payable by individual) at, say, 40% – £140
  • National Insurance (payable by company) at 13.8% – £48.30

Benefit in Kind rates do change year on year, therefore this is not set in stone, however currently it is very efficient (for tax purposes) to have an electric company car compared to a petrol or diesel car.

  • VAT treatment

The VAT treatment for vehicles can vary depending on the type of purchase, type of vehicle and how the vehicle is used within the business.

Generally speaking, VAT cannot be reclaimed on the purchase of cars with private use, therefore if a car was purchased for an employee to use privately, no VAT would be reclaimable.

Alternatively, if a vehicle was hired and provided to an employee, and VAT was charge on the hire, 50% of the VAT can be reclaimed.

There are other situations, such as the purchase of a Van, or where a vehicle is used solely for business use, where the VAT reclaim may be higher.

For more information regarding the potential tax savings of purchasing a car for your use in your business, please do call us on