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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. Indeed, many UK contractors and company directors are looking to purchase an electric company car through their contracting limited company. In addition, many others also look to purchase hybrid company cars as a cheaper alternative for their director’s company car. What’s more, many who investigate contractor company car also consider an electric car lease through limited company.
Therefore, if you are thinking about leasing or buying an electric car for business through your limited company, what should you consider? In addition, in terms of company cars for directors, what are the benefits and advantages of running a UK contractor electric car?
the distance travelled and fuel consumed, i.e., miles per gallon (MPG) or litre. However, with an electric car (limited company), comes some good advantages as well as some disadvantages too. Indeed, there are arguments for and against the move to electric vehicles. Furthermore, some people say electric vehicles are fun to drive. However, as an owner of a UK contracting company there are also some significant tax advantages too. Therefore, let’s look at what to consider when you buy an electric or hybrid vehicle through your company as your next contractor car.
Buy an electric company car through limited company
An electric car has an electric motor. Indeed, the energy stored in the car’s batteries is converted into the rotation of the wheels. In comparison, 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. Therefore, 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. In addition, every year they design these to encourage those businesses with company cars for directors and employees to choose vehicles with lower levels of CO2 and (from April 2018) NOx emissions.
In the March 2023 Budget, it was announced that company car benefit in kind % rates will be frozen however:
- 2025/26 -the rate will increase by 1% for cars < 75g/km.
- 2026/27 -the rate will increase by a further 1% for cars < 75g/km.
- 2027/28 -the rate will increase by a further 1% for cars < 75g/km.
Please read on to find out how company and personal tax and indeed tax savings work when your company buys an electric vehicle.
The types of vehicles available
Today, you may be considering buying a company director electric car. Therefore, when you do this, you can consider:
- Buying a hybrid car through limited company.
- Buying an electric car through business.
Someone may ask is a hybrid car an electric car and the answer is no, as there are some key differences between them. What’s more, in 2023 there are lots of choices available when you are buying a ltd company electric car or buying a hybrid car through limited company. Therefore, in terms of buying an electric company car:
- Pure electric cars -these are electric only and also known as battery electric vehicles. Indeed, they run off one power source, the electric battery. In addition, 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. What’s more, 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. Indeed, 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.
Other initial thoughts
Hybrid vehicles -buy hybrid car?
You may ask yourself should I buy a hybrid car and what is the tax relief on hybrid cars (UK)? What’s more, a second hand or brand-new petrol hybrid car will have tax advantages and be cheaper to run. Therefore, although many UK limited company contractors and small business owners investigate buying electric company cars, there is a lot of interest in hybrid company cars.
Therefore, should I buy a hybrid car (UK) as a limited company contractor or small business owner? Indeed, when we look at company cars for directors, as an alternative to buying an electric car through their limited company, many contractors and company directors may opt instead to investigate hybrid cars.
One of the main benefits of the hybrid vehicle is the greater fuel economy. Certainly, a hybrid contractor car will use up to 30% less fuel per mile than a conventional fuel-powered vehicle. As a result, this will be very fuel efficient and 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. To sum up, there is tax on hybrid cars when you run one of these, however the hybrid car tax is not currently as low as an electric car.
Incentives when you buy electric car through limited company
There are several tax benefits and other incentives for employers and employees when they choose low-emission cars. Indeed, this includes an electric company car as well as hybrid cars. Therefore, it is now tax efficient to buy or lease a contractor electric car or hybrid vehicle through your own UK company. What’s more, many UK contractors now choose to do this as well as other UK business owners.
It is key to note that if you are a sole trader, there is no actual concept of a company car. Further, this is because you and your business are the same legal entity. In contrast, when you have your own contractor 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.
The Benefits in Kind (BiK) on contractor electric cars
Electric company car rules for directors and employees
In the UK, how are company cars taxed? Basically, under the current system that is in place, the ltd company car tax is a combination of:
- The National Insurance(NI) that the company pays, via form P11D(b).
- The Income Tax that the employee pays, via the tax code which is applied to their salary.
Most importantly, the company car tax for the company and employees are based on the Benefit in Kind (BiK). What’s more, the BiK is calculated based on a percentage of the car’s official value/list price (which you report on form P11D). In addition, 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.
How are Benefits in Kind on company cars calculated?
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%). What’s more, HMRC will collect this through PAYE, which applies to the employee’s salary. In addition, when you complete a Self Assessment tax return, the car benefit will need including as part of your employment benefits. However, the company car benefit will still be included as part of your tax code which applies to your salary.
With regard to the employer/company, the BiK is taxable at the Class 1A NI rate, which is currently 13.8% (this was 14.53% in 2022/23 due to a mixture of rates as the government increased the rate in Spring 2022 then reverted on the change in Autumn of that year). However, this is an allowable expense in the company accounts. As a result, it saves Corporation Tax (CT) at the current rate of 19% or 25%.
UK company contractor car tax for electric cars and hybrid cars -the P11D value used
The actual rates for BiK (electric cars) and petrol/diesel cars depend on the amount of CO2 emissions, the electric range and the year that you bought the vehicle.
HMRC have a table which shows how the percentage BIK rates vary with vehicle CO2 and electric-only range. Indeed, this represents petrol, diesel, hybrid and electric car BIK rates for the tax years 2022-2025.
What to consider, when you run company electric cars and hybrid cars
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 company car will likely cost you and your business less than traditional petrol or diesel vehicles. Therefore, 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 contractor 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. What’s more, this currently costs £15 per day between 7 am and 10 pm daily. In addition, there is also the ULEZ scheme that is planned for the future.
Contractor electric car lease through limited company
Instead of buying the contractor car through your company, the business could look into how to lease electric car through limited company. Therefore, when you have researched electric car lease through limited company and found out the process, you could opt to go for a contractor car lease for an electric company car instead. As a result, when leasing electric car through business, the company can claim the electric car lease costs for the vehicle as a business expense. In addition, it can also reclaim 50% of the VAT.
When you undertake a limited company electric car lease the benefits and BiK work the same as when your business buys the vehicle. However, it is also worth noting that many contractors and business owners will opt for an electric car lease through limited company, as opposed to buying the vehicle.
Depreciation and Capital Allowances
In a set of company accounts, we claim for depreciation on fixed assets. Therefore, we claim for depreciation on an electric car when a business has one. However, although we claim for depreciation on a car in the company accounts, the company saves tax based on the Capital Allowances. As a result, 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. Therefore, this means you can claim tax relief through your company on the full cost. Further, the allowance first became available in April 2020 and works like the Annual Investment Allowance (AIA). As a result, under AIA you receive 100% tax relief on the asset in the year of purchase; this is the same with electric cars.
- Second-hand cars including electric cars will qualify for either main rate allowances or special rate allowances. However, this depends when you bought the car and the amount of CO2 emissions it emits. This HMRC guide explains how these rates apply.
A similar 100% FYA also applies for zero-emission vans. To clarify, this applies 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 addition, this reduces the amount of CT that a company pays.
Therefore, the cost of a new car with zero CO2 emissions 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 contractor 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 when buying an electric car through limited company (UK)
Jim is a contractor who purchases a limited company electric car that costs £40,000. What’s more, the BiK rate on this is 25%. In addition, 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. However, 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 contractor 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.
When we look for the most tax-efficient company car for directors, it is key to note electric cars and hybrid cars are currently more expensive vehicles to buy than cars with petrol or diesel engines. However, even when we consider buying or leasing electric cars for company directors, you would pay far less annual tax when you run an electric car through a business.
Lease an electric or hybrid car as a UK contractor or small business owner
Lease or buy an electric car through limited company
If you decide to investigate this further, you may be looking for the best electric company car available. Alternatively, you may also be looking for the cheapest contractor electric car. Therefore, you could start this process by searching for the best electric company car (UK) and looking at the latest Tesla model. Certainly, many UK contractors proceed with buying a Tesla through limited company after doing some research.
You could look at what other electric cars Tesla provides, and the cost involved for both purchasing outright or a contractor car lease. Indeed, Tesla is the current leader in the market, and once you have an idea, you could do some more research elsewhere. Therefore, when you have decided on a new vehicle, you should ensure that you check that this will be tax-efficient.
As a UK contractor who runs our own business, the above example’s tax savings pale insignificance when you compare what you can save with the First Year Allowance. Certainly, this allows you to save Corporation Tax on the full cost of the vehicle. Therefore, a £40,000 investment into one of the electric 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 contractor car in the future. To clarify, 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.
Lease or buy a hybrid car through limited company
You may decide that you would like to investigate hybrid company cars rather than their electric counterparts. Therefore, as part of this process, you could start by looking into the best hybrid company car and compare it to the lowest BiK hybrid cars. In addition, you can also research the best plug-in hybrid company car.
In terms of road tax for hybrid cars, we can investigate how company car tax on hybrid cars works. However, when we consider do you pay road tax on hybrid cars, the road tax is lower than conventional vehicles and this is one of the benefits of hybrid cars. Furthermore, it depends on the actual car itself in terms of its g/km and pure electric range. Therefore, you could do a search for the best hybrid for company car tax.
As with electric cars, there are hybrid cars pros and cons (UK) and it is important to do your research. To sum up, when you find a vehicle that you like, you can check out the tax implications with your accountant.
In recent years, of the contractors that opt for a company car, more and more are choosing to look to buy a contractor electric car or take out a contractor car lease as their future method of getting around. However, 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
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