Electric and hybrid cars for limited company directors

Introduction 

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

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. 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 

When you consider a new vehicle for your business, you could 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 in terms of hybrid and electric vehicles:

  • 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. They can be recharged internally using their onboard internal combustion engine-powered generator.

Incentives are offered to employers and employees when they choose low-emission cars, such as electric ones. Indeed, at the moment, 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). 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 this percentage. 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. 

Benefits in Kind

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 that 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). 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. 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:

  • The 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, which currently costs £15 per day between 7 am and 10 pm daily. 

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

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, 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 you buy this.

Not surprisingly, with the substantial tax breaks for both businesses and employees 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 consider investing in one.

A quick example

Jim is a contractor who purchases a company car that costs £40,000. 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. 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 tax-efficient electric or hybrid car?

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 (if the contractor is taxable at 20% at their highest tax rate) would be £160 (£40,000 x 0.02 BIK x 20% tax rate). 

Further considerations

In reality, electric cars and hybrid cars are currently more expensive vehicles to buy than cars with petrol or diesel engines. However, even when considering this, you would pay far less annual tax when you run an electric car through a business.

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. 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. 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 remembered that your company would need to pay CT on the sale of the car 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. 

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. 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

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

Published On: August 1st, 2022 / Categories: Expenses, Other Guides /

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