The tax cost to both employers and employees of providing petrol or diesel cars has been steadily increasing over the last few years, making electric vehicles a more viable option.
For those looking to purchase an alternative fuel vehicle, an electric car may be worth considering for its varied tax aspects.
Employees who are provided with company cars for private use are liable to pay income tax on the value of the ‘benefit in kind’. This is calculated using a percentage of the car’s list price, with the percentage determined according to the car’s CO2 emissions.
The maximum appropriate percentage for the highest emitting vehicles is 37%. For a car with CO2 emissions of up to 50g/km and an electric mileage range of 130 and above, the percentage reduces to 2%.
A 40% taxpayer provided with a £90,000 Mercedes with CO2 emissions of 165g/km, would see their tax bill reduce from £13,320 to £720, by switching to a similarly priced Tesla.
The company will pay Class 1A National Insurance at 13.8% on the value of the benefit provided. Using the Mercedes and Tesla mentioned above, the National Insurance cost to the company would fall from £4,595 to £248.
Providing fuel for a petrol or diesel car is a benefit in kind, with income tax payable by the employee based on fuel scale charges.
Employers pay National Insurance at 13.8% on the benefit value. Electricity, unlike petrol and diesel, is not classed as a fuel, so the fuel scale rate charges do not apply to electric cars.
The installation of a charging point at the employee’s home address associated with providing a company car is not considered a benefit in kind either.
If the employee charges the car at home, and the employer pays directly for the electricity costs associated with business journeys only, then the amount paid is not taxable. However, if the employer reimburses electricity costs for both private and business mileage, the amount is taxable on the employee. In this case, the employee can claim a deduction for business mileage.
Alternatively, if the employee bears the electricity costs themselves, they can claim tax relief for the cost of business miles travelled. The advisory rate for fully electric cars is 9p per mile.
It’s not considered a taxable benefit if employers provide employees with a charge card, allowing access to public charging points. Employees can charge an electric car from a charging point at work without a benefit arising.
A brand new fully electric car with emissions of 0g/km, purchased through a limited company, attracts a First Year Allowance of 100%. This allows a deduction against corporation tax for the full cost of the car in year 1 of ownership, compared to other vehicles which generally do not qualify for 100% allowances.
The allowance applies if the vehicle is purchased outright or via hire purchase, but not if it’s leased and the company doesn’t own the vehicle.
If the vehicle is leased by the employer, the monthly rental cost will be a deduction for the company, reducing the profits and corporation tax liability.
The company will be able to deduct hire purchase interest payments, reducing the profits and corporation tax liability.
It’s important to bear in mind that although there are tax differences in providing electric and traditional cars, the benefit in kind charges have increased since 2019. The current rates are fixed until 2024/25, from which will increase by 1% each year to 2027/28.
Electric cars are more expensive, so companies need to consider the initial outlay in making the change to electric. If you would like to discuss the practical aspects of opting for an alternative fuel vehicle, Director Gail Swinburn (firstname.lastname@example.org) will be able to assist with your business needs.