Electric and hybrid cars for limited company directors

Introduction 

Today, electric and hybrid cars are fairly new on the scene.  Indeed, as time moves forward, vehicles with electric power should become more energy-efficient and more friendly to the environment.

The government sets the company car tax rates in the UK. They design these to encourage company car drivers to choose vehicles with lower levels of CO2 and (from April 2018) NOx emissions.

Today, there is lots of choice available in terms of hybrid and electric vehicles:

  • Pure electric cars – these are also known as battery electric vehicles and they run off one power source only which is the electric battery.
  • Hybrid electric vehicles -these offer the versatility of using either electric energy or a combination of petrol and electric.
  • Mild hybrid -these offer only a minor amount of electrical assistance to the engine and this is not enough for the car to run purely on electric power.
  • Charging hybrid -these vehicles are self-charging and they are not plugged in to recharge. The battery is recharged when running the combustion engine and by regenerative braking.
  • Plug in hybrid versions -these are hybrid electric vehicles and their battery pack can be recharged by plugging a charging cable into an external electric power source. Secondly, they can also be recharged internally by using their on-board internal combustion engine-powered generator.

Incentives are offered both to the employer and the employee when they choose low emission vehicles such as electric cars. Indeed, at the moment it is tax efficient to buy or lease an electric or hybrid car through your own company.

How are company cars taxed? 

Under the current system that is in place, the company car tax and National Insurance (NI) that both the company and employee pay, are both based on a percentage of the official value/list price of the car (which you report on form P11D). The car’s CO2 emissions primarily determine this percentage.  Therefore, the list price of the car, multiplied by the appropriate percentage give the Benefit in Kind and this is subject to tax and NI.

Benefits in Kind  

The BIK is calculated using the following formula:

P11D value x BIK rate = BIK value

As far as the employee goes, the Benefit in Kind (BIK) is taxable at the appropriate personal tax rate (20%, 40%, or 45%). HMRC will collect this through PAYE, which applies to the employee’s salary.

In terms of the employer/company, the BIK is taxable at the Class 1A NI rate, which is currently 15.05%. This is an allowable expense in the company accounts and saves Corporation Tax (CT) at the current rate of 19%.

The actual rates   

Company car tax for electric cars and hybrid cars

The CO2 emission percentages are as follows:


Vehicle CO2 emissions
BiK rate
(Electric, Petrol, RDE2 Diesel)
2022-23 2023-24 2024-25
0 g/km 2% 2% 2%
1-50 g/km (electric range >130 miles) 2% 2% 2%
1-50 g/km (electric range 70-129 miles) 5% 5% 5%
1-50 g/km (electric range 40-69 miles) 8% 8% 8%
1-50 g/km (electric range 30-39 miles) 12% 12% 12%
1-50 g/km (electric range <30 miles) 14% 14% 14%
51-54 g/km 15% 15% 15%
55-59 g/km 16% 16% 16%
60-64 g/km 17% 17% 17%
65-69 g/km 18% 18% 18%
70-74 g/km 19% 19% 19%
75-79 g/km 20% 20% 20%
80-84 g/km 21% 21% 21%
85-89 g/km 22% 22% 22%
90-94 g/km 23% 23% 23%
95-99 g/km 24% 24% 24%
100-104 g/km 25% 25% 25%
105-109 g/km 26% 26% 26%
110-114 g/km 27% 27% 27%
115-119 g/km 28% 28% 28%
120-124 g/km 29% 29% 29%
125-129 g/km 30% 30% 30%
130-134 g/km 31% 31% 31%
135-139 g/km 32% 32% 32%
140-144 g/km 32% 33% 33%
145-149 g/km 34% 34% 34%
150-154 g/km 35% 35% 35%
155-159 g/km 36% 36% 36%
160-164 g/km 37% 37% 37%
165-169 g/km 37% 37% 37%
>170 37% 37% 37%

Extra 4% charge for diesel cars   

* Please add 4% for diesel cars up to a maximum of 37% (unless RDE2 compliant). Diesel plug-in hybrids are alternative fuel vehicles. Therefore, the 4% diesel supplement does not apply to these vehicles irrespective of RDE2 compliance

Electric cars and hybrid cars -what to consider 

Running costs

Just like vehicles with diesel or petrol engines, the cost of running an electric vehicle will vary depending on the make, model and specifications of the electric vehicle.

Over the course of ownership, an electric vehicle is likely to cost you less than a traditional petrol or diesel vehicle. The two main reasons are:

  • Electricity costs a lot less than petrol and diesel.
  • The maintenance costs of an electric car are less than that of an internal combustion engine (ICE).

Furthermore, there are also various incentives in place such as:

  • Government grants and schemes.
  • Discounts or exemption from Vehicle Excise Duty.
  • Exemption from Fuel Duty.
  • Exemption from the congestion charge in London which currently costs £15 per day between 7am and 10pm every day.

Depreciation and Capital Allowances   

Although we claim for depreciation on a car in the company accounts, the company actual saves tax based on the Capital Allowances that are claimed. The Capital Allowances are claimed in the company’s Corporation Tax workings.

Capital Allowances for electric cars   

Until 1 April 2021 (5 April 2021 for income tax) and now continuing beyond this date until the government announces otherwise, low or zero-emission electric or hybrid cars can qualify for a 100% first-year allowance (FYA).

This allowance is providing its CO2 emissions do not exceed 50g/km, and the car is purchased new and unused.

A similar 100% FYA applies for zero-emission vans, where the vehicle is purchased new and unused before 1 April 2021, or 5 April 2021 for income tax.

First-Year Allowances are a type of Capital Allowance, and these are deductible against profits, and this, in turn, reduces the amount of CT that a company pays.

Therefore, the cost of a car with CO2 of 50 or less will be fully deductible against profit in the year that you buy this.

Not surprisingly, with the huge tax breaks for both business and employee for an electric car, it is not difficult to see why contractors and small business owners who do not already own an electric vehicle should be thinking about investing in one.

A quick example 

If a contractor purchases a car and it costs £40,000, the BIK rate is 25%.

He or she is then taxable at basic rate tax at his highest rate. As a result, heir she will pay £2,000 in tax (40,000 x 0.25 x 0.2) for each year that the company owns the car and provides it to him/her. There is also, of course, the fuel benefit to take into account if you are provided with fuel by your company, which we have not included here.

If you opted for a tax efficient electric or hybrid car instead, what could you save?

In 2022/23, the savings will be more significant when the lowest BIK bracket falls to just 1% therefore for an electric car costing £40,000 that falls into the lowest bracket the annual tax charge (if the contractor is taxable at 20% at his or hers highest tax rate) would be £400 (40,000 x 0.01 x 0.2).

Further considerations   

In reality, electric cars and hybrid cars are currently more expensive vehicles to buy than cars with petrol engines or diesel engines. However, even when taking this into account, you would pay far less tax per annum when you run an electric car through a business. If you decide do to go ahead you may be looking for the best electric car or the cheapest electric car. In both cases, you should ensure that you check that this will be tax efficient.

As a contractor of your own business, the savings above would pale into insignificance when you compare what you can save with the First Year Allowance. A £40,000 investment into one of the electric cars and hybrid cars available out there would generate a £7,600 saving in CT. However, you also need to bear in mind that as a VAT registered business, your own company would need to pay CT on the sale of the car, when you come round to selling the vehicle either back to you personally or to a third party. Therefore, if you kept the car for a few years and sold the car at its then value of £15,000 your company would need to pay CT of £2,850.

Final thoughts 

In recent years, of the contractors that opt for a company car, more and more are indeed looking at electric driving as their future method of getting around. Also, as the benefit in kind charge is 2% for the most energy-efficient vehicles now, we will see more contractors opting for the electric or hybrid cars option due to this being tax efficient.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: March 6th, 2021 / Categories: Expenses, Other Guides /

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