Electric vehicles; key for reaching sustainable targets

With the government intent on decarbonising cars and vans as part of its initiative to phase out all new petrol and diesel cars and vans by 2035, it is no wonder there are now big tax benefits to be had when opting to go for an electric vehicle. Electric vehicles hold the key for the government in reaching this more environmentally sustainable target.

*Please note all tax rates used were correct at the time of writing.

Benefit in Kind

The use of a company car by any employee, business owner or director creates a benefit in kind charge subject to both Income Tax on the employee and Class 1A National Insurance Contributions for the company.

Currently the taxable benefit on a fully electric car is set at only 2% of the cars list price for the following three tax years (2022/23 to 2024/25).

An example to put this into perspective…

• A BMW X4 with a list price of approx. £60,000 and 151g/km CO2 emissions for 2022/23 would have a taxable benefit in kind of £60,000 * 35% = 21,000 annually.
• In addition, if the company provided fuel for the employees private use, a further benefit in kind would be assessable on the BMW of £24,500 * 35% = £8,575 annually.
• A Tesla Model 3 with a list price of approx. £60,000 and 0g/km CO2 emissions for 2022/23 would have a taxable benefit in kind of £60,000 * 2% = £1,200 annually.

If the employee charges either their own car, or the company owned electric car at the workplace, no benefit in kind will arise. Equally an employer can fit an electric charging point at an employees home without a benefit in kind arising; although this provision applies only if the employee has a company electric car (a benefit in kind will arise if an employer fits a charging point at a employees home for their private electric car). 

To conclude, the annual benefit in kind value for a company to provide a staff member with a BMW X4 to include private fuel is £29,575 compared to the Tesla where the annual benefit in kind cost will be just £1,200 for both the use of the car privately and electric charging.

Hybrid company cars

These are vehicles that combine an electric motor with a petrol or diesel engine. In respect of hybrid cars, the benefit in kind percentage rate depends on the cars CO2 emissions in addition to the electric mileage range.

Typically, the higher the electric mileage range the lower the benefit in kind percentage will be, so less tax is payable.

For example, a car with CO2 emissions of less than 50g/km and an electric range of 125 miles will be taxed at 5% of the cars list price. Whereas a car with the same emissions but an electric range of just 25 miles will have 14% applied to the cars list price.

If employers provide private fuel for the hybrid car a further benefit in kind would arise based on a fixed £24,500 at the appropriate percentage.

Electric vans

At present for the current tax year (2022/23) there will be no benefit in kind for fully electric vans provided to staff which includes private use. As opposed to vans with CO2 emissions, where there is a fixed benefit of £3,600 in addition to a van fuel benefit of £688 where private fuel is also provided.

Capital Allowances

Capital allowances allow businesses to write down their qualifying capital expenditure on plant or machinery against their taxable income.

For expenditure on fully electric new and unused cars, with no CO2 emissions, up until 31 March 2025, businesses will be able to claim 100% first year allowances on the electric car. This 100% first year allowance also extends to electric charging points. Resultantly this allows businesses a full deduction against taxable income in the tax year of purchase.

Whilst business cars with CO2 emissions not exceeding 50g/km will be eligible for writing down allowances at the main rate (18%) per tax year meanwhile cars with CO2 emissions exceeding 50g/km will be eligible for writing down allowances at the special rate (6%) per tax year.

This analysis excludes leased cars for which no capital allowances are available.

Mileage claims for electric vehicles

We have all become accustomed to a tax free reimbursement of 45p per business mile (for the first 10,000 miles) and 25p thereafter when driving a privately owned vehicle for business purposes. This 45p/25p rate is an ‘approved mileage allowance payment’ and is calculated to cover the vehicles running costs and depreciation in addition to fuel. This rate of 45p/25p also applies even when an employee uses their privately owned hybrid or electric car for business trips.

This rate is slightly different when you are using a company provided car and seeking reimbursement for business mileage, you are entitled to an ‘advisory fuel rate’. The reimbursement for business mileage driven in a diesel, petrol or hybrid company car is between 9p and 25p per business mile (dependent on the cars engine size). These amounts are set to cover fuel costs only since it is not a privately owned vehicle.

In respect of fully electric cars, the advisory fuel rate is currently set at 5p per business mile when driving a company provided electric vehicle. This 5p is set to cover the employees cost of electric charging, which in some instances could take place at the employees home, should they have a charging point available.

There are additional amounts available for tax free reimbursement where an employee takes a passenger on a business trip.

Summary

It is clear that purchasing company vehicles that are either fully electric or have limited CO2 emissions do offer significant tax savings for both employees and employer businesses.

If you would like any more information or are considering purchasing a company vehicle we can assist you to ensure the tax aspects are carefully thought through.

How can Haines Watts help?

We advise clients with a broad range of tax related matters across a number of sectors throughout Exeter and the South West, including property matters.

If you would like to have a conversation to understand the complexities of the above changes, please get in touch with your usual Haines Watts contact.