Introduction -electric cars for company directors
Today, electric cars are relatively new on the scene, as are hybrid cars. Indeed, as time progresses, vehicles with electric power should become more energy-efficient and friendly to the environment. Due to this, many contractors and company directors are looking to purchase or lease an electric company car through their limited company.
Up to now, we should all be aware of the fuel economy, which illustrates the relationship between the distance travelled and fuel consumed, i.e., miles per gallon (MPG) or litre. With electric cars comes some good advantages as well as some disadvantages too. Indeed, there are arguments for and against the move to electric vehicles. Some people say they are fun to drive; however, as a UK business owner, there are also some significant tax advantages to buying an electric or hybrid vehicle through your company.
An electric car has an electric motor. The energy stored in the car’s batteries is converted into the rotation of the wheels. Notably, a food processor works on the same principle.
A charging point is where you will charge an electric car. In addition, more of these are appearing all over the UK on an ongoing basis. Depending on where you live and the type of house/street, you could also potentially install a charging point for your electric vehicle at home.
The government sets the company car tax rates in the UK. Every year, they design these to encourage company car drivers to choose vehicles with lower levels of CO2 and (from April 2018) NOx emissions.
The types of vehicles available
If you think about buying a company director electric car, when you go ahead and do this you can consider:
- Buying a hybrid car through a limited company.
- Buying an electric car through a limited company.
In 2022, there are lots of choices available when you are buying a hybrid car through your limited company or buying an electric car. Therefore, in terms of buying an electric company car:
- Pure electric cars -these are electric only and are also known as battery electric vehicles. Notably, they run off one power source, the electric battery.
- Hybrid electric vehicles offer the versatility of using electric energy or a combination of petrol and electricity.
- Mild hybrid -these offer only a minor amount of electrical assistance to the engine. Please note that this is not enough for the car to run purely on electric power.
- Charging hybrid -these vehicles are self-charging and not plugged into recharge. Key to note, 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. In addition, plug-in hybrid cars can be recharged internally using their onboard internal combustion engine-powered generator.
Besides electric cars, there is a lot of interest in hybrid vehicles. As an alternative to buying an electric car through their limited company, many contractors and company directors may opt instead to investigate hybrid cars.
Notably, one of the main benefits of these vehicles is the greater fuel economy. A hybrid car will use up to 30% less fuel per mile than a conventional fuel-powered vehicle. As a result of this fuel efficiency, you will save money on your fuel costs.
The benefits in kind on a hybrid company car are also lower than on a conventional vehicle, although not as low as an electric car.
Incentives are offered to employers and employees when they choose low-emission cars, such as electric ones. Indeed, now, it is tax efficient to buy or lease an electric or hybrid vehicle through your own company.
How are company cars taxed?
Under the current system that is in place, the company car tax is a combination of:
- The Income Tax that the employee pays.
The company car tax for the company and employees are based on the Benefit in Kind (BIK).
Please note, the BIK is calculated based on a percentage of the car’s official value/list price (which you report on form P11D).
The car’s CO2 emissions primarily determine the percentage to use for the BIK.
Therefore, the car’s list price, multiplied by the appropriate percentage rate, gives the Benefit in Kind (BIK). As a result, the BIK is subject to tax and NI as shown above.
Please note that if you are a sole trader, there is no actual concept of a company car. This is because you and your business are the same legal entity. In contrast, when you have your own limited company, both you and your company are two separate legal entities. Therefore, when you have your own company, it can own a director company car and provide this to you as an employee of your company.
Benefits in Kind (BIK) -electric cars
As briefly explained above, the BIK is calculated using the following formula:
P11D value x appropriate percentage for your vehicle = 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%). Important to note, HMRC will collect this through PAYE, which applies to the employee’s salary.
Regarding 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, as a result, this 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). Notably, 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
Just like vehicles with diesel or petrol engines, the cost of running a company director electric car will vary. That is to say, this will vary depending on the electric vehicle’s make, model and specifications.
Throughout ownership, an electric vehicle will likely cost you less than traditional petrol or diesel vehicles. There are two main reasons for this, and these 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 (compared to CO2 emission vehicles, which have an annual charge for road tax).
- An exemption from Fuel Duty.
- An exemption from the congestion charge in London. Please note, this currently costs £15 per day between 7 am and 10 pm daily.
Electric car lease through limited company
Instead of buying the car through your company, the business could lease it instead. The business can claim the lease costs for the vehicle and 50% of the VAT.
Depreciation and Capital Allowances
Although we claim depreciation on a car in the company accounts, the company saves tax based on the Capital Allowances. Therefore, Capital Allowances are claimed in the company’s Corporation Tax workings as part of this.
Capital Allowances for electric cars for company directors
The current allowances for company cars are:
- New and unused cars with zero CO2 emissions will attract a full 100% first-year allowance. This allowance first became available in April 2020 and works like the Annual Investment Allowance (AIA). Under AIA, you receive 100% tax relief on the asset in the year of purchase; this is the same with electric cars.
- Cars with CO2 emissions below 50g/km can claim an 18% writing-down allowance in the main pool.
- Cars with higher CO2 emissions are placed in the special rate pool (6% rate of capital allowances).
A similar 100% FYA also 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. 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 you buy this.
Not surprisingly, with the substantial tax breaks for both businesses and employees for an electric car, you can see the benefits. Therefore, it is not difficult to see why contractors and small business owners who do not already own an electric vehicle should consider investing in one.
A quick example
Jim is a contractor who purchases a limited company electric car that costs £40,000. Notably, the BIK rate on this is 25%. His personal income is less than £50,270. Therefore, he is in the basic rate of tax.
When working out the tax, Jim is taxable personally at his highest tax rate of 20%. As a result, he will pay £2,000 in tax (£40,000 car price x 0.25 BIK x 20% tax rate) each year the company owns the car and provides it to them. Please note, there is also the fuel benefit to take into account if you are provided with fuel by your company. However, we have not included this here.
What could you save if you opted for a company director electric car that is either electric or hybrid and is more tax-efficient?
In 2022/23, the savings will be more significant when the lowest BIK bracket falls to just 2%. Therefore, for an electric car costing £40,000 that falls into the lowest bracket, the annual tax charge will be:
- If the contractor is taxable at 20% as their highest tax rate, the tax cost will be £160.
£40,000 x 0.02 BIK x 20% tax rate = £160.
- If the contractor is taxable at 40% as their highest tax rate, the tax cost will be £320.
£40,000 x 0.02 BIK x 40% tax rate = £320.
In reality, electric cars and hybrid cars are currently more expensive vehicles to buy than cars with petrol or diesel engines. However, even when we consider electric cars for company directors, you would pay far less annual tax when you run an electric car through a business.
Buy an electric car through limited company
If you decide to look into this further, you may be looking for the best electric car available. Alternatively, you may also be looking for the cheapest electric vehicle. Therefore, you could start this process by looking at the latest Tesla model. In addition, you could look at what other electric cars Tesla provides and the cost involved. Tesla is the current leader in the market, and once you have an idea, you could do some more research elsewhere.
When you have decided on a new vehicle, you should ensure that you check that this will be tax efficient.
As a contractor of your own business, the above example’s tax savings pale insignificance when you compare what you can save with the First Year Allowance. Most importantly, a £40,000 investment into one of the electric and hybrid cars available would generate a £7,600 saving in CT. However, it would help if you also remember that your company will need to pay CT on the sale of the car in the future. This will be when you come round to sell the vehicle either back to you personally or to a third party. Therefore, if you kept the car for a few years and sold it at a future value of £15,000, your company would need to pay CT of £2,850.
Buy a hybrid car through limited company
You may decide that you would like to investigate hybrid cars rather than their electric counterparts. As part of this process, you could start by looking into the lowest BIK hybrid cars. You can also investigate road tax for hybrid cars. When we consider do you pay road tax on hybrid cars, this is lower than conventional vehicles however it depends on the actual car itself in terms of its g/km and pure electric range.
In recent years, of the contractors that opt for a company car, more and more are choosing to look at electric driving as their future method of getting around. This is a consequence of the tax relief that is currently available. In addition, 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 because this is very tax-efficient.
Link to Contractor Advice UK group on