Corporation Tax, Personal Tax

Electric Car Tax: The benefits of electric vehicles in 2021

Luke Fletcher

Luke spent a decade at two of the UK’s largest accounting firms delivering tax advice to household names. Frustrated by the lack of tax advice offered to small businesses, and the 'once a year' compliance led approach from most traditional accountants Luke set up Raw. Using his experience, Luke now helps owner managed and entrepreneurial businesses take back control of their finances through simple, jargon-free advice. As an ICAEW Chartered Accountant and tax advisor, Luke loves nothing more than helping his clients pay less tax and maximise their earnings. Commercially minded and pragmatic, Luke prides himself on building long lasting, trusted client relationships.

April 20, 2021

For company owners, there has arguably never been a better time to purchase an electric car. The current electric car tax regime makes electric car ownership a compelling proposition. But even more crucially electric car ownership is increasingly feasible thanks to new vehicles like the new Renault Zoe, and Vauxhall Corsa electric which both clock over 230 miles on a single charge. So, lets see why 2021 is probably the year to go electric.

What is a company car

A company car is where a limited company provides a vehicle to an employee, including Directors, for both business and personal use. This usually forms part of the overall remuneration package of the employee.

As the employee is able to use this vehicle personally, they are receiving a benefit in kind and so it’s only natural that HMRC will want to attach a value to this benefit and tax the employee. So how do HMRC calculate the value of the company car benefit in kind and what are the tax consequences for the employee or Director?

Calculating the Benefit in Kind (BIK)

The formula to calculate the benefit in kind includes a number of variables and is summarised below:

Manufacturer list price x BIK percentage = BIK value

So let’s breakdown exactly what each of these variables are.

The manufacturers list price is the manufacturers price for the vehicle, including standard accessories and VAT. Optional extras such as alloy wheels should also be added to the list price. If you’re not sure what the list price for your vehicle is, then its worth checking your paperwork/vehicle quote or speaking to the manufacturer. There are also a number of databases which provide list prices including this one.

The Benefit in Kind Percentage is a fixed percentage based on the CO2 emissions and fuel type of your vehicle. You can find a full list of HMRC rates here, which detail what the percentage is. If you’re not sure what the CO2 emissions are for your vehicle its worth checking your paperwork or speaking to the manufacturer. The database previously referenced can also provide details of the CO2 emissions.

So why is 2021 the year to go electric?

When you look at the HMRC rates you will notice one thing, the higher the CO2 emissions, the higher the BIK percentage. This usually results in a high tax charge for both the company and the employee/director who uses the car.

However, investing in low or zero emission vehicles can significantly reduce the tax cost for both parties. That’s because the BIK percentage’s for fully electric or plug in hybrids with an all electric range are much lower. Let’s look at an example:

The BIK percentage for a fairly typical car with 150g/km of CO2 in 2021/22 is 34% (for vehicles registered after 6 April 2020). For a car with a list price of £35,000 this triggers an annual car benefit of £11,900. The tax cost in this case would be £2,380 for a basic rate taxpayer (calculated at 20%) or £4,760 for higher rate taxpayers (calculated at 40%).

However, for low emission vehicles the relevant percentages are significantly lower. So low, that for 2021/22 a zero emission vehicle (fully electric) has a relevant percentage of 1%, rising to 2% for 2022/23. On the same list price of £35,000 that’s an annual benefit of just £350 with a tax cost of £70 for basic rate taxpayers or £140 for higher rate.

The relevant percentage increases slowly as CO2 emissions rise, meaning plug in hybrids with an all-electric range should also be considered, particularly if you are concerned about the practicality of an all-electric vehicle.

Electric car tax: Capital allowances

For the company, if it purchases a new car, and the CO2 emissions are greater than 50g/km then the business will only get tax relief on the car at 6% per year. Meaning it will take years to obtain full relief for the cost of the car.

Cars with CO2 emissions between 1-50g/km or second-hand electric vehicles currently receive tax relief at 18% per year, which speeds up the rate of relief.

Meanwhile new zero emission vehicles qualify for tax relief at 100%, giving rise to an immediate tax deduction. In our example, the £35,000 car would attract an immediate tax deduction of £6,650. So, if you plan to purchase a company car it really is a no brainer to look at all electric options.

Electric car tax: Leasing

If the company leases the car rather than purchases it, then cars with emissions greater than 50g/km are subject to a 15% restriction on leases costs, meaning only 85% of the cost is allowed for corporation tax purposes.

Cars with emissions lower than 50g/km will benefit from full relief for corporation tax purposes.

It’s also possible to claim 50% of the VAT back on company leases which can make leasing an attractive proposition for some VAT registered businesses.

So is now the time to go electric?

If you are looking for an electric car then the current regime provides an opportunity for company owners to significantly reduce both your personal and corporation tax bill for the next few years. But when buying a new company car or entering into a new lease it’s crucial that you plan carefully and make sure that you understand the benefit in kind percentage and tax charge that will arise. If you’ve got any questions then just get in touch with us and we’d be happy to help.