Electric Cars – Tax Incentives Explained

  • Posted on: 18 October 2021
  • By: Rachael

You may have heard it’s more efficient to have an all-electric company car but you don’t know how it works or what is involved.  So let me break it down for you. 

In the main, this comes down to how you currently fund the cars in your business.  If you have employees with a company car already or claiming mileage, the benefits of switching to an electric car are huge.  Not only are you saving the environment, but you can save thousands of pounds too. 

If it’s your personal car and you currently claim mileage from the business, it will depend on whether your mileage exceeds the lease amount.  If you claim a lot of mileage, the electric incentive is unlikely to be a cost-effective way of funding the car in the business. 

Benefit in Kind (BiK) Considerations

Company cars often create more personal tax liability through a benefit in kind than the company saves on corporation tax, making them an unfavourable option.  Many employees prefer to claim mileage instead, finding this method more cost-effective. 

Fully electric cars now pay a 1% benefit in kind rate, 2% in 2022/23, making them a cost-effective option for my employers. 

For example, if a company provided a Tesla Model S Long Range AWD Auto:

 

For a full financial year 2021/22, the company would pay NI (13.8%) of the BiK at £126.82 & an employee on higher rate tax would pay £368. 

Compare this to a petrol BM X5 with a lower list price of £78,635 and the company would pay £3,897.67 & an employee on higher rate tax would pay £11,298. 

 

Road Tax

Fully electric cars are exempt from road tax. 

 

Mileage

The advisory rate for electric cars is 4pm per mile, a lot lower than the 45p per mile paid for petrol and diesel cars up to 10,000miles. 

Mileage per year

10,000 miles

20,000 miles

Petrol Car

£4,500

£7,000

Fully Electric Car

£400

£800

Mileage saving per annum

£4,100

£6,200

 

In the example above you can see how an electric car can save the company thousands in expenses claims.  Particularly useful if you pay your employees milage. 

 

Salary Sacrifice Schemes

Electric cars are allowed under salary sacrifice schemes, working similarly to childcare vouchers, and the cycle to work scheme do.  The only difference is that they still attract the benefit in kind. 

The company rents the car from a supplier, and the employee rents it from the employer.  The employee pays for the vehicle out of their gross pay before tax, effectively saving the tax they would pay if they leased the car directly. 

Many leases will offer no deposit, insurance for the first year, servicing and maintenance and even breakdown cover under the monthly cost.  Different providers vary, so it’s important to know what additional costs will be incurred. 

These agreements tend to attract customers with low monthly repayments and annual mileage allowance, meaning that anything over the agreed mileage incurs additional costs.  The additional mileage is generally between 8 – 15p per mile; however it is still cheaper than paying 45p per mile expenses cost.  I recommend getting a lease that covers the expected mileage, and some agreements allow you to change the mileage mid-year.   

 

Example of employee on 80K annually, with an electric car a BiK value of £60K:

£500p/m fully electric lease car

Car lease directly (personal)

Car on salary sacrifice through employer (business)

Pay

80,000

80,000

Tax

19,428

17,028

NI

5,479

5,359

Car payment

6,000 personal direct

6,000 (pre tax scheme)

BiK

0

240

Net Pay (After car payment)

49,093

51,373

 

The employer will also save money on NI payments. 

Employer Payments:

Employer’s NI

9,820

8,992

NI due on BiK

0

83

Total Employer payment

9,820

9,075

 

The employee is £2,280, and the employer is £745 better off per year. 

 

VAT

The employer can reclaim 50% of the VAT on lease payments, provided the company is registered for VAT on the standard scheme.  There’s a consideration for both the employee and employer to agree who will absorb the other 50% VAT charge. 

 

Additional Considerations

The current BiK rate is 1%, up from 0% last year.  It will rise to 2% next year.  It would be fair to say it is likely to continue to rise. 

If the employee has excess wear & tear, the employer will be liable unless a formal contract is in place between employee and employer. 

As with above, if the lease does not cover insurance, either the employer passes this cost onto the employee or will have to pay BiK on the insurance cost and pay the insurance premium. 

 

Summary

 

Pros:

  • For employees, a salary sacrifice scheme is the most cost-effective way to drive an electric car. 
  • Potential to upgrade to a new vehicle after 24-38 months, depending on the agreement. 
  • Reduced tax for both employer and employee
  • The vehicle can be used for business & personal use
  • Improved staff recruitment and retention
  • Lower carbon footprint

 

Cons:

  • Admin cost of P11d forms to be produced for each employee with a company car
  • The employee or the employer will not own the car
  • Potential excess mileage costs
  • Potential additional insurance & wear and tear costs
  • If the employee leaves, the company is still liable for the repayments until the end of the agreement, some agreements can be terminated early with a penalty fee which is often around 50% of the remaining payments