electric company car for directors and contractors

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Introduction 

Today, electric cars, as are hybrid vehicles, are still relatively new on the scene. As time progresses, cars with electric power should become more energy-efficient and environmentally friendly. Indeed, many UK contractors look to purchase an electric car through limited company. Besides electric company cars, many others are looking to buy hybrid company cars. They’re a cheaper alternative to a director’s company car. Furthermore, many investigating contractor company cars can consider a UK contractor electric car lease through limited company. If you’re thinking about leasing or buying an electric car for business through your limited company, what should you consider when viewing potential new contractor cars? Also, regarding company cars for directors, what are the benefits and advantages of running an electric car for a UK contractor?

There are many choices when looking for the best company car; where do you start? Before buying a company car, a good starting point is to research the company car tax on electric cars (UK) and electric car incentives (UK). Therefore, what should you think about for your next contractor’s car?

Many IT contractors and company directors generally look to run a car through their company. One of the keys here is to look for tax-efficient company cars. In addition, depending on what you choose, you can make tax savings along the way. One main factor in buying an electric vehicle through your company is the electric car Corporation Tax relief. A secondary factor is the low Benefit in Kind when leasing or buying an electric car through a company. Indeed, the electric car Benefit in Kind (BiK) is much lower than the BiK for petrol or diesel cars. Consequently, the personal tax on electric company cars is much lower than on conventional vehicles.

Initial thoughts 

First thoughts on hybrid or electric car for a limited company 

When buying a new company car, contractors should look at the sums for electric and hybrid cars (UK). Moreover, if unsure, they should ask their accountant before purchasing or leasing an electric vehicle through a limited company. This guide will investigate this and consider the advantages and disadvantages of electric cars (UK). Further, we’ll look at what to consider as a UK contractor regarding one of these vehicles. Therefore, let’s research the best car to buy through a limited company. As part of this, let’s consider what to look for in the best electric & hybrid cars. In this guide, we’ll investigate the best company car in terms of tax and consider how to find the best company cars in 2024.

The fuel economy and initial thoughts on a new company vehicle

We should all be aware of fuel economy. This illustrates the relationship between the distance travelled and fuel consumed, in other words, your vehicle’s miles per gallon (MPG) or litre. However, when looking for the best work vehicles for contractors, you can now consider electric or hybrid vehicles. Basically, an electric car (limited company) has some advantages and disadvantages. Indeed, there are arguments for and against the move to electric vehicles.

Some people say electric vehicles are fun to drive. However, as a UK contracting company owner, there are some significant tax advantages too. These come when you lease or buy an electric car through limited company. When you purchase or lease an electric or hybrid vehicle, you should check the energy or fuel consumption per mile. Therefore, we’ll consider the best work vehicle for contractor purposes in this guide. Also, we’ll look at buying an electric or hybrid vehicle through your company as your next contractor car.

What should you consider before buying an electric company car through a limited company? 

Begin your search

When you begin the search for an electric car for a UK contractor or other business owner, the first thing to note is an electric vehicle 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.

When you’re buying a car as a contractor and are considering an electric vehicle (limited company), a charging point is where you’ll charge this. In addition, more of these are continuously appearing all over the UK. Therefore, depending on where you live and your type of house/street, you could potentially install a charging point for your electric vehicle at home. When charging at home, you’ll require off-road parking, such as a driveway or garage. What’s more, you must be able to get power to it. Many now charge from the comfort of their own homes, and if you can do this, it’s more convenient.

The government sets the company car tax rates in the UK. In addition, they design these every year to encourage 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 electric car Benefit in Kind % rates would 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 business buys a company electric motor vehicle.

Electric or hybrid? 

Today, you may be considering buying a company director electric car. Therefore, when you research buying an electric car through limited company (UK), you can consider the following:

  • Buying a hybrid car through a limited company.
  • Buying an electric car through your business.

Someone may ask if a hybrid car is an electric car, and the answer is no, as there are some key differences between them. Moreover, when considering an electric car, company director options in 2024 include many choices when buying a ltd company electric car or a hybrid car through a limited company. Therefore, regarding buying a contractor electric car, please see below.

What are the current types of electric vehicles?

In our guide to electric company car options, here’s a list of the current vehicle types available:

  • Pure electric vehicle (EV) -battery electric vehicles running off a single power source only (electric battery). There’s no combustion engine, which means they’re the cleanest option. They never produce tailpipe emissions, so they are the most sustainable.
  • Battery electric vehicle (BEV) -these vehicles receive power solely from an electric battery. They have gas engine parts, and most BEVs can use fast or L2 charging. They have zero emissions.
  • Plug-in hybrid (PHEV) -hybrid electric vehicles and their battery packs can be recharged by plugging a charging cable into an external electric power source. They can also recharge internally using their onboard internal combustion engine-powered generator.
  • Hybrid (HEV) -these are powered by an internal combustion engine and one or more electric motors, which use energy stored in batteries. HEVs offer the benefits of high fuel economy and low tailpipe emissions. They also have the power and range of conventional vehicles.
  • Full hybrid (FHEV) -known as parallel hybrid, these vehicles use a combustion engine and electric motor to drive, either simultaneously or independently. They’re the most common type of hybrid but the battery only holds small amounts of electric charge.
  • Mild hybrid electric vehicle (MHEV) -offers a minor amount of electrical assistance to the engine. Also, this isn’t enough to run the car purely on electric power.
  • Range-extended electric vehicle (RE-EV) -all-electric vehicles with an electric motor providing the power. These vehicles have a small ICE present to generate additional electric power.
  • Hydrogen fuel cell electric vehicle (FCEV) -these cars are powered by compressed hydrogen gas, which feeds an onboard fuel cell stack that doesn’t burn the gas but transforms the fuel’s chemical energy into electrical energy. The electricity then powers the car’s electric motors.

Hybrid vehicles & look to buy a hybrid car (UK)?

You may ask yourself, should I buy a hybrid car, and what is the tax relief on hybrid cars (UK)? Moreover, a second-hand or brand-new petrol hybrid car has tax advantages and is cheaper to run. Therefore, although many UK limited company contractors and small business owners investigate buying electric cars, there’s a lot of interest in hybrid company cars.

Therefore, should I buy a hybrid car (UK) as a limited company contractor or as a 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 company hybrid vehicles.

One of the main benefits of the hybrid vehicle is its greater fuel economy. Indeed, a hybrid contractor car will use up to 30% less fuel per mile than a conventional fuel-powered vehicle. As a result, it will be very fuel efficient, and you’ll 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’s tax on hybrid cars when you run one. However, the hybrid car tax isn’t as low as that of electric alternatives.

What are the incentives when you buy an electric car through limited company?

Contractor electric car benefits (limited company) and costs require careful consideration when buying a new car for your business. For instance, there are several hybrid and electric car tax benefits (limited company) and other incentives for employers and employees when they choose low-emission cars. Indeed, this includes electric as well as hybrid vehicles. Therefore, it’s now tax-efficient to buy or lease a contractor electric or hybrid vehicle through your own UK company. Moreover, many UK contractors and other UK business owners now choose to do this.

Sole trader

It’s key to note that if you’re a sole trader, there’s no actual concept of a `company car’. Further, this is because you and your business are the same legal entity. In contrast, when you’ve got your own contractor limited company, you and the business are separate legal entities. Therefore, when you’ve got 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) on contractor electric cars 

Electric company car rules for directors (UK) and employees 

As a contractor in the UK, what are the electric company car tax costs? Basically, under the current system in place, the hybrid or electric car tax is a combination of:

  • The Income Tax the employee pays via the tax code, which is applied to their salary.

Most importantly, the hybrid or electric vehicle company car tax for both the company and employees is based on the Benefit in Kind. Moreover, 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. As a result, the BiK is subject to tax and NI, as shown above. 

How do you calculate Benefits in Kind on company 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 is taxable at the appropriate personal tax rate (20%, 40%, or 45%). Moreover, 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 is included 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.

Regarding the employer/company, the BiK is taxable at the Class 1A NI rate of 13.8%. 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%.

Therefore, the company car tax on electric vehicles is a combination of the employer Class 1A NIC and the employee income tax, as shown above. 

UK company contractor car tax for electric & hybrid vehicles & the P11D value 

The actual rates for BiK (electric cars), BiK (hybrid cars) and BiK (petrol/diesel cars) depend on the amount of CO2 emissions, the electric range, and the year you bought the vehicle. 

HMRC has an official table showing how the BiK rate percentage varies with vehicle CO2 and electric-only range. Indeed, this table represents petrol, diesel, hybrid, and electric car BIK rates for the tax years 2022-2025 (rates are frozen for 2024 and 2025).

What to consider when you run company electric cars and hybrid cars? 

Running costs for an electric motor vehicle

Just like vehicles with diesel or petrol engines, the cost of running a company director electric car will vary. Indeed, that’ll vary depending on the car’s make, model, and specifications.

Throughout ownership, an electric company motor will likely cost you and your business 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 contractor car are less than an internal combustion engine (ICE).

Furthermore, there are 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. This currently costs £15 per day between 7am and 10pm. In addition, the ULEZ scheme is in place, although it could be cancelled in the future. 

Contractor hybrid or electric car lease through limited company 

Instead of buying the contractor car through your company, as another option, the business could investigate a limited company electric car lease. Therefore, when leasing a hybrid or an electric car through limited company, you should do some research. Once you’ve researched the process of a business electric car lease through limited company, if you prefer this option, you could opt for a contractor car lease for a hybrid or electric motor. As a result, when leasing an electric car through business, the company can claim the contractor lease car costs for the vehicle as a business expense. In addition, the business can reclaim 50% of the VAT on the ltd company’s electric car lease. These are both hybrid and electric car leasing tax benefits.

When you undertake a limited company electric car lease, the benefits and BiK work the same as when your business buys the car outright. When considering the Benefit in Kind, electric cars have a much lower BiK than conventional petrol and diesel cars. However, checking the BiK for hybrid cars is key, as the BiK on these are higher than their electric counterparts. In addition, it’s worth noting that many contractors and business owners opt for a car leasing arrangement instead of buying the vehicle. Under both scenarios, it’s key to research the tax on company cars for directors.

Buy an electric or hybrid motor through your UK company

When a business buys an electric or hybrid car, it can save tax with the First Year Allowance. Indeed, this allows you to save Corporation Tax on the full vehicle cost. Therefore, a £40,000 investment into an electric vehicle would generate a £7,600 CT savings (19%). However, it’ll help if you keep in mind that your company must pay CT on the future sale of the contractor’s car. To clarify, that’ll be when you come around 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 pay CT of £2,850 (19%). 

Depreciation & Capital Allowances   

In a set of company accounts, we claim depreciation on fixed assets. Therefore, we claim depreciation on an electric motor when a business has one. However, although we claim depreciation on a car in the company accounts, the company saves tax based on the Capital Allowances on the vehicle. As a result, Capital Allowances, which are set by HMRC, are claimed in the company’s Corporation Tax workings as part of this process.

Another good resource to use is this electric car update from Ross Martin. 

What are Capital Allowances for electric cars for company directors?

The current allowances for company cars are:

  • New and unused cars with zero CO2 emissions attract a full 100% first-year allowance. Therefore, you can claim tax relief through your company on the full cost. Further, the allowance 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, which applies to new electric cars with zero emissions.
  • Second-hand cars, including electric ones, qualify for main or special rate allowances. However, this depends on when you bought the car and its CO2 emissions. This HMRC guide explains how these rates apply.

A similar 100% FYA applies to zero-emission vans until April 2025. 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, they reduce the amount of CT a company pays.

Therefore, the cost of a new electric car with zero CO2 emissions is fully deductible against profit in the year you buy it.

Not surprisingly, you can see the benefits of the substantial tax breaks for businesses and employees who buy an electric contractor car. Therefore, it’s not difficult to see why contractors and small business owners who don’t already own an electric vehicle should consider investing in one.

More electric company car considerations

A quick example when buying an electric car through limited company (UK)

Jim is a contractor who purchases a limited company electric car, which costs £40,000. The BiK rate on this is 25%. In addition, his personal income is less than £50,270. Therefore, he’s 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’ll 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 him. However, there’s the fuel benefit to consider if your company pays for your fuel. However, we haven’t included this here.

What could you save if you opted for a company director electric or hybrid electric car that is more tax-efficient?

In 2023/24, the savings are more significant when the lowest BiK bracket is just 2%. This 2% rate is frozen until 2025. Therefore, for an electric contractor car costing £40,000, which falls into the lowest bracket, the annual tax charge is:

  • If the contractor is taxable at 20% as their highest tax rate, the cost is £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 cost is £320.

£40,000 x 0.02 BiK x 40% tax rate = £320.

Furthermore:

  • For 2025/26, the rates for emissions under 75gm/km increase by 1%
  • For 2026/27, the rates for emissions under 75gm/km increase by a further 1%
  • For 2027/28, the rates for emissions under 75gm/km by a further 1%

Therefore, the charge for electric cars will rise from 2% to 5% over the above period.

Further thoughts on a hybrid or electric company car

When looking for the most tax-efficient company car for a contractor or director, it’s key to note that electric and hybrid vehicles are currently more expensive than cars with petrol or diesel engines. However, even when we consider buying or leasing electric cars for company directors, you’d pay far less annual tax when you run an electric motor through a business.

Should you lease a hybrid or electric car as a UK contractor?

Leasing an electric car through limited company

If you decide to investigate leasing an electric car through a limited company, you may be looking for the best electric company vehicle available. Alternatively, you may be looking for the cheapest electric motor to lease. Furthermore, you could consider a used electric car lease as this may be less costly. Therefore, you could start the electric car business lease (UK) process by searching for the best electric car lease. You can begin your search by looking for the best electric company car (UK) and look at the latest Tesla model. Indeed, many UK contractors buy a Tesla through a limited company (UK) after doing some research.

You could look at what other electric motors Tesla provides and the cost of 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 more research elsewhere. Therefore, when you’ve decided on a new electric car for your business, you should ensure it’ll be tax-efficient before taking out a limited company car lease.

As a UK contractor, if you decide to lease an electric car through business, there are some excellent benefits to an electric car business lease, as we mentioned earlier. Indeed, the electric company car lease costs are genuine business expenses, and you can reclaim 50% of the VAT on these costs. However, on the other hand, there’s the tax cost for the company and employee on the hybrid car benefit in kind, but these are only small given the current low BiK rates for electric vehicles.

Leasing a hybrid car through a limited company 

Let’s now consider leasing hybrid cars (UK) and research what to consider for hybrid company car leasing. As a contractor, you may investigate hybrid company cars rather than their electric counterparts. As part of a potential hybrid car lease (UK) process, you could start by looking into the best hybrid company car. You could research the tax costs of such a vehicle and look up the costs for some of the low BiK hybrid cars. Further, you could compare the costs for the best hybrid vehicle to some hybrid cars with the lowest BiK. Furthermore, as part of a hybrid car business lease, you can research the best plug-in hybrid company car.

Let’s now investigate how this works regarding road tax for hybrid cars. When considering whether you pay road tax on hybrid cars, the road tax is lower than that of conventional contractor vehicles. That’s one of the tax benefits of hybrid cars (UK).

As with buying a company vehicle, the BiK and company car tax for hybrid cars under a lease depends on the actual vehicle in terms of its g/km and pure electric range. Therefore, you should find the BiK rate for hybrid cars and research hybrid car tax benefits. Consequently, you could search for the best hybrid for company car tax.

As with electric vehicles, there are company hybrid cars with pros and cons (UK), and it’s key to do your research. Once again, you can claim the lease costs and 50% of the VAT regarding tax and benefits. However, there’s a tax on the hybrid vehicle benefit in kind. To summarise, when you find a vehicle you like, you can check out the tax implications of hybrid cars with your accountant. 

Final thoughts 

In recent years, of the contractors who opt for a car through their business, more are choosing to buy a contractor electric car or take out a contractor car lease as their future method of getting around. However, buying or leasing an electric car through limited company is indeed a consequence of the tax relief currently available for an electric company car. Moreover, the Benefit in Kind charge is 2% for the most energy-efficient vehicles now. Therefore, we’ll see more contractors opting for the electric or hybrid cars option because it’s very tax-efficient.

If you’re considering buying a new vehicle, look up the best deals available. Indeed, if you’re planning on a hybrid vehicle, you should look up the best hybrid cars for company car tax. In either case, you should check the associated electric or hybrid car BiK rate for a hybrid or electric vehicle.

Link to Contractor Advice UK group on

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

Published On: April 6th, 2024 / Categories: Expenses, Other Guides /

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