Switching to an electric car brings many benefits. We all have a social responsibility to ensure we are reducing our carbon footprint as much as we possibly can. But it’s worth considering the financial incentives that come with it as well.

The mileage of an electric car is only increasing. Capable of travelling up to 300 miles on a single charge, electric vehicles are becoming more and more attuned to business driving needs making the switch even more appealing.

The Government are driving this idea forward with tax incentives designed to convince more businesses to make the change if the environmental impact isn’t already enough.

The tax incentives for buying electric cars

Several tax benefits come with buying an electric car, including reduced taxes and financial incentives such as electric car benefit in kind.

Road tax on electric cars

You’ll already be aware of road tax. Every car has to be taxed to be driven on the road, with the cost dependant on emissions.

With electric cars cutting the emissions of their fossil-fueled counterparts, there is a reduction to road tax for electric vehicles.

For the first year, road tax on an electric car is free! Immediately you’ll be seeing the savings of cutting your carbon emissions to zero. Subsequent years are also free.

You will only start to pay road tax on your electric vehicle if it cost you over £40,000 to buy, and even then it’ll cost you less than a diesel or petrol vehicle.

Some hybrid electric cars, however, will still emit CO2. If you have a hybrid vehicle that emits less than 100 g/km, you could be paying between £0 and £135 per year for road tax.

Tax benefits applicable to all ultra-low emission vehicle (ULEV) users

Fuel Duty

Every litre of road fuel purchased will have a fuel duty charge. This is levied on all combustible fuels, but those driving an electric, battery-powered vehicle are exempt from the charge.

Vehicle Excise Duty (VED)

All vehicles on the road are subject to VED. If a vehicle has been registered on or after 1 March 2001, its VED rate is based on CO2 emissions.

All cars registered before 1 April 2017 that emit less than 100g CO2/km are exempt from VED. Hybrid cars are classified as alternative fuel vehicles. While they are also subject to VED, they receive a £10 discount.

VAT

Vehicles are subject to a standard rate of VAT, regardless of their emissions. 20% VAT is charged for business use however, any electricity supplied for personal and charity use is charged at just 5%.

Charging your electric vehicle at home means you can take advantage of the 5% VAT, but charging at a workplace will mean paying the full 20%.

Taxes applicable to business users only

Taxation of company cars

A company car made available for personal use is treated as a benefit in kind and is known as company car tax. This is subject to income tax and employer Class 1A National Insurance contributions.

With the benefit being valued as an ‘appropriate percentage’ of the car’s total list price, the percentage of tax charged is again based on the car’s CO2 emissions.

Ultra-low emission vans are not affected by CCT because they are subject to van benefit charges.

Salary sacrifice for the provision of benefit in kind

Reducing an employees salary in exchange for the provision of a ULEV as a benefit in kind brings Income Tax and NI tax advantages.

Car Fuel Benefit Charge

Electricity is not a fuel, therefore, ULEVs do not receive the fuel benefit charge. It does apply to plug-in hybrids, however, as they still use petrol and diesel.

Workplace electric vehicle charging – benefit in kind exemption

From 6 April 2018, employees charging their own electric vehicle at work are not liable to pay tax on the value of the electricity used.

The BiK rate for electric cars is 1% during the 2021/22 financial year. This is rising to 2% for 2022/23 and will remain there during 2023/24 and 2024/25.

Van Benefit Charge

You need to report a zero emission van on your P11D form at 0% of £3,500 which is £0.

Van Fuel Benefit Charge

As mentioned under ‘Car Fuel Benefit Charge’, electricity is not fuel. Currently, there is no fuel benefit charge for electric vans.

Advisory Fuel Rates (AFRs)

There are AFRs for both diesel and petrol vehicles and these can be used if you have a hybrid vehicle. There are no AFRs for battery electric vehicles.

Enhanced Capital Allowances (ECAs)

In order to be eligible for a 100% first-year allowance, your business must have purchased a car that emits 0g CO2/km, zero-emission goods vehicles or ULEV recharging infrastructure.

Tax on charging an electric car at work

Having charging points installed at your workplace means your business will be charged for the electricity used. It is worth knowing whether you or your employee will need to pay tax or National Insurance on the electricity used for charging a vehicle.

The Government website has a tool to help you quickly work this out.

Input tax recovery on charging costs

Sole proprietors can recover input tax on charging their vehicles to the extent of business use, so will need to apportion any charging costs between business and private/non-business use.

Normal input tax rules apply so if the business is not fully taxable it may need to restrict the input tax under the partial exemption rules.

If an employee was to charge their vehicle at their place of work, the input tax can be recovered, but only to the extent of business use. If a business normally recovers input tax in full on electric bills it will need to carry out some apportionment to reflect private use of the electricity.

Employees must remember to provide details of both their business and private mileage. Instead of apportioning the input tax, output tax could be accounted for on the deemed supply for private use.

This could be done using the advisory fuel rate for fully electric cars of 4p per mile, which is much less than that of a diesel car which is from 9p per mile and a petrol car which is from 11p per mile.


 

We might not be equipped to sell you an electric car, but what we can do is help you find your way around the changes it means to your business.

There are many benefits to driving an electric car, and with it becoming more the norm than ever, now might be the time to start thinking about the change.

You can find more legislation on the Government website and for any questions you need answering, just give us a call!