Electric and hybrid cars

Introduction 

Today, electric and hybrid cars are fairly new on the scene.  Indeed, as time moves forward, these 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.   

Incentives are offered both to the employer and the employee when they choose low emission vehicles such as electric cars and hybrid cars.   

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.   

Benefits in kind   

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 their salary.   

In terms of the employer/company, the BIK is taxable at the Class 1A NI rate, which is currently 13.8%. 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 and hybrid cars 

The CO2 emission percentages for electric cars and hybrid cars for the current, previous, and next tax year are as follows:

CO2 (g/km) Electric range (miles) Registered pre 06/04/20 Registered post 05/04/20
% of a car’s list price that is taxed % of a car’s list price that is taxed
0 N/A 1 1
1-50 >130 2 1
1-50 70-129 5 4
1-50 40-69 8 7
1-50 30-39 12 11
1-50 <30 14 13
51-54 15 14
55-59 16 16
60-64 17 17
65-69 18 18
70-74 19 19
75-79 20 20
80-84 21 21
85-89 22 22
90-94 23 23
95-99 24 24
100-104 25 25
105-109 26 26
110-114 27 27
115-119 28 28
120-124 29 29
125-129 30 30
130-134 31 31
135-139 32 32
140-144 33 33
145-149 34 34
150-154 35 35
155-159 36 36
160+ 37 N/A
170+ N/A 37

Extra 4% charge for diesel cars   

* 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

What to consider 

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 for 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 and 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 is then taxable at basic rate tax at his highest rate. As a result, he 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. There is also, of course, the fuel benefit to take into account if you are provided with fuel by your company, which I have not included here.   

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

In 2021/22, 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 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, but even taking this into account, you would pay far less tax per annum.   

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.

Final thoughts 

In recent years, of the contractors that opt for a company car, more and more are looking at electric and hybrid cars as their company vehicle. Also, as the benefit in kind charge is about to drop to zero for the most energy-efficient vehicles from 6 April 2020, we will see more contractors opting for the electric or hybrid cars option.   

Link to Contractor Advice UK group on 

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

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

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