electric company car for directors and contractors

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Introduction 

Today, electric cars are still quite new on the scene, as are hybrid vehicles. As time progresses, vehicles with electric power should become more energy-efficient and friendly to the environment. Indeed, many UK contractors look to purchase an electric car through limited company. Besides an electric company car, many others look to purchase hybrid company cars. This is because they’re a cheaper alternative for their director’s company car. Furthermore, many who investigate contractor company car also 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, in terms of company cars for directors, what’s the benefits and advantages of running a UK contractor electric car?

There’s so much choice when looking for the best company car, therefore where do you start? A good starting point before buying a company car 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, as well as company directors in general look to run a company car. 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 of the main factors of 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 electric car through company. Indeed, the electric car Benefit in Kind (BiK) is much lower than the BiK on petrol or diesel cars. Consequently, the personal tax on electric company cars is also much lower than on conventional vehicles.

Initial thoughts 

First thoughts on hybrid or electric car for limited company 

When buying a new company car, contractors should look at the sums for electric and hybrid cars (UK). What’s more, if they’re unsure, they should ask their accountant before buying or leasing an electric vehicle through limited company. In this guide, we’ll investigate this and consider the advantages and disadvantages of electric cars (UK). Further, we’ll look at what to consider as a UK contractor in terms of one of these vehicles. Therefore, let’s research the best car to buy through limited company. As part of this, let’s consider what to look for in the best electric & hybrid cars. We’ll also investigate the best company car for tax and consider how to find the best company cars 2023. 

Fuel economy and initial thoughts on a new company vehicle

Up to now, we should all be aware of the fuel economy. This illustrates the relationship between the distance travelled and fuel consumed. In other words, the miles per gallon (MPG) or litre for your vehicle. However, when you’re looking for the best work vehicles for contractors, you can now consider electric or hybrid vehicles. Basically, 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. These come when you decide to lease or buy electric car through limited company. When you buy or lease an electric or hybrid car, it’s also wise to check the energy or fuel consumption per mile. Therefore, in this guide, we’ll consider the best work vehicle for contractor purposes. Also, we’ll look at buying an electric or hybrid vehicle through your company as your next contractor car.

Common questions on buy electric car (UK)

Many business owners, including contractors will have questions regarding leasing or buying an electric car through a limited company. Such questions on electric cars for business owners will include:

  • Should I buy an electric car through my limited company?
  • Can I lease an electric car through my limited company (UK)?
  • Is a second-hand electric car tax-deductible?
  • What is the Benefit in Kind on electric cars?
  • What is the BiK on hybrid cars?
  • How do hybrid cars work (UK)?
  • How much tax can you save with an electric vehicle?
  • Which hybrid car should I buy?
  • How much does it cost to run a hybrid car?
  • Are hybrid cars exempt from road tax?
  • How to convert petrol car to hybrid car?

In this guide, we’ll look at hybrid & electric cars (UK) for contractors and business owners. What’s more, we’ll discover how you can save tax when you buy or lease one through your company. 

Buy an electric company car through limited company

Begin your search

When you begin the search for 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 will charge this. In addition, more of these are appearing all over the UK on an ongoing basis. Therefore, depending on where you live and your type of house/street, you could also 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. You’ll also need to 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, 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 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:

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

Someone may ask is a hybrid car an electric car and the answer is no, as there’s some key differences between them. What’s more, when considering an electric car, company director options in 2024 include lots of choices available when you’re buying a ltd company electric car or buying a hybrid car through limited company. Therefore, in terms of buying an electric company car, please see below.

Types of electric vehicles

Below is a list of the current types of vehicles available:

  • Pure electric vehicle (EV) -known as battery electric vehicles running off a single power source only (the electric battery). There’s no combustion engine meaning they’re the cleanest option. They never produce tailpipe emissions so are the most sustainable.
  • Battery electric vehicle (BEV) -these vehicles receive power solely by an electric battery. They’ve gas engine parts and most BEVs can use fast charging or L2 charging. Zero emissions.
  • Plug in hybrid (PHEV) -hybrid electric vehicles and their battery pack can be recharged by plugging a charging cable into an external electric power source. Also, plug-in hybrid vehicles can recharge internally using their onboard internal combustion engine-powered generator.
  • Hybrid (HEV) -powered using an internal combustion engine along with one or more electric motors which use energy stored in batteries. HEVs utilise the benefits of high fuel economy along with low tailpipe emissions. They’ve 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) -offer 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) -in effect an all-electric vehicle, 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 rather transforms the fuel’s chemical energy into electrical energy. The electricity then powers the car’s electric motors.

Hybrid vehicles -buy hybrid car (UK)?

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’s 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 company hybrid vehicles.

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’ll 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 of these, however the hybrid car tax isn’t currently as low as an electric alternative.

Incentives when you buy electric car through limited company

When you’re planning on buy a new company car, contractor electric car benefits (limited company) and costs need careful consideration. For instance, there’s 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. What’s more, many UK contractors now choose to do this as well as other UK business owners.

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 have your own contractor limited company, both you and the business 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 (UK) and employees 

In the UK, how is a ltd company car taxed? Basically, under the current system that’s in place, the hybrid or electric company car tax is a combination of:

  • The Income Tax that 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 are based on the Benefit in Kind. 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. 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 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.

Regarding 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%.

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

UK company contractor car tax for electric and hybrid vehicles -the P11D value used 

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 that you bought the vehicle. 

HMRC have an official 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 

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, this’ll vary depending on the electric company 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. Basically, there’s 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’s 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’s also the ULEZ scheme that’s now 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, as part of how to lease a hybrid or lease 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 and, if you prefer this option, you could opt for a contractor car lease for a hybrid or electric motor. As a result, when leasing 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 also reclaim 50% of the VAT on the ltd company 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 electric company car. When we consider the Benefit in Kind, electric cars have a much lower BiK than conventional petrol and diesel cars. However, it’s also key to check the BiK for hybrid cars, as the BiK on these are higher than their electric counterparts. Also, it’s also worth noting that many contractors and business owners will opt for a car leasing arrangement, as opposed to buying the vehicle. Under both scenarios, it’s key to research the tax on company cars for directors.

Buying an electric or hybrid motor through your company

When a business buys an electric or hybrid car, it can save tax 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 an electric vehicle would generate a £7,600 saving in CT (19%). However, it would also help if you kept in mind that your company will need to pay CT on the sale of the contractor car in the future. To clarify, this’ll 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 (19%). 

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 motor when a business has one of these. However, although we claim for 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 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. 

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, 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 and this applies to new electric cars with zero emissions.
  • Second-hand cars including electric cars qualify for either main rate allowances or special rate allowances. However, this depends on 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 electric company car with zero CO2 emissions is 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’s not difficult to see why contractors and small business owners who don’t already own an electric vehicle should consider investing in one.

Other 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 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’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 also the fuel benefit to consider if you’re provided with fuel by your company. However, we haven’t included this here.

What could you save if you opted for a company director electric car that’s 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.

Further considerations in respect of an electric company car

When we look for the most tax-efficient company car for directors, it’s key to note electric and hybrid vehicles are currently more expensive 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 motor through a business.

Leasing a hybrid car or electric car as a UK contractor

Leasing 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 also 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 could also start your search by looking for the best electric company car (UK) and look at the latest Tesla model. Certainly, many UK contractors proceed with buying a Tesla through limited company (UK) after doing some research.

You could look at what other electric motors 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’ve decided on a new electric company car, you should ensure that you check that this’ll be tax-efficient before you take out a limited company car lease.

As a UK contractor, if you decide to lease an electric car through business, there’s some good electric car business lease benefits as we mentioned earlier. Indeed, the electric company car lease costs are genuine business expenses, and you can also reclaim 50% of the VAT on these costs. However, on the other side 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 hybrid car through limited company 

Let’s now consider lease hybrid cars (UK) and research what to consider for hybrid company car leasing. As a contractor, you may decide to 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 of the hybrid cars with lowest BiK. Furthermore, as part of a hybrid car business lease, you can also research the best plug-in hybrid company car.

In terms of road tax for hybrid cars, let’s now investigate how this works. When we consider do you pay road tax on hybrid cars, the road tax is lower than 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 car itself, in terms of its g/km and pure electric range. Therefore, you should find the BiK rate for hybrid cars and do your own research on hybrid car tax benefits. Consequently, you could spend time searching the best hybrid for company car tax.

As with electric vehicles, there’s company hybrid cars pros and cons (UK) and it’s key to do your research. Regarding tax and benefits, once again you can claim the lease costs and 50% of the VAT. There is also tax on the hybrid vehicle benefit in kind. To sum up, when you find a vehicle that you like, you can check out the hybrid company car tax implications with your accountant. 

Final thoughts 

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, buying or leasing an electric car through limited company is indeed a consequence of the tax relief that is currently available for an electric company car. What’s more, 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 this is very tax efficient.

If you’re thinking of going ahead with a new vehicle, you should 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, a hybrid or electric vehicle, you should check the associated electric car or hybrid car BiK rate.

Link to Contractor Advice UK group on

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

Published On: January 4th, 2024 / Categories: Expenses, Other Guides /

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