The UK Government is committed to net zero greenhouse gas emissions by 2050 and part of that plan includes encouraging the switch to electric vehicles facilitated by a range of tax incentives for both individuals and businesses.

We are increasingly being asked to provide clients with advice and support on the potential benefits and implications of making the switch to electric vehicles.

If you are thinking about changing your fleet to low or zero emission vehicles this article outlines the main employer-focussed tax considerations/benefits to inform your decision.

Personal Tax 

There is an annual benefit in kind (BIK) taxed on the employee who uses the vehicle if there is an element of private use on that vehicle.  The benefit in kind is calculated as a % of the list price (the price at which the manufacturer recommends that the retailer sell the vehicle) and will be taxed (20%/40%/45%) as non-savings income. 

For pure electric vehicles, the benefit in kind for the 2021/22 tax year is 1% of the list price, rising to 2% for the next 3 tax years (2022/2023 to 2024/2025). 

For hybrid vehicles, the % benefit in kind depends on the electric mileage range: 

CO2 emissons g/kmElectric mileage rangeCars registered before 6/4/20Cars registered after 6/4/20
1 to 50130 and above2%1%
1 to 5070 to 1295%4%
1 to 5040 to 698%7%
1 to 5030 to 3912%11%
1 to 50less than 3014%13%
Taxable Benefits in kind for hybrid cars in the tax year 2021/22

Source: gov.uk

Note: Vehicles registered after 06th April 2020 are subject to the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) rates.

Example: Electric vehicle with list price of £40,000. Benefit in kind for a 40% tax paying employee would be (£40,000 x 1% x 40%) £160. 

Class 1A National Insurance 

The employer will also have to pay Class 1A National Insurance on the car benefit in kind figure. This will be 13.8% of the total car benefit and will be fully deductible when calculating corporation tax. 

Example: Based on above example the Class 1A charge would be (£400 x 13.8%) £55. 

Corporation tax – purchase  

If the company car is purchased, capital allowances are available to claim tax relief for the cost of the vehicle. The amount of relief and how quickly you can claim it depends on the C02 emissions – please see below: 

Car
Description
What you can
claim
Relief
Further
details
New & unused, CO2
emissions are 0g/km
(or car is electric)
first year
allowances
100% Deduct the full cost
from your profits
before tax
New & unused, CO2
emissions are between
1g/km and 50g/km
Main rate
allowances
18%Can claim 18%
of the vehicle cost
each year
Second hand, CO2
emissions are between
1g/km and 50g/km
(or car is electric)
Main rate
allowances
18%Can claim 18%
of the vehicle cost
each year
New or second hand,
CO2 emissions are
above 50g/km
Special rate
allowances
6%Can claim 6%
of the vehicle cost
each year
Capital Allowances for Purchased Vehicles

Corporation tax – leased 

The company receives full corporation tax relief on the monthly lease costs of company vehicles if the C02 emissions are less than 50g/km.  

If the C02 emissions exceed 50g/km, then only 85% of the lease costs are deductible for corporation tax.  

VAT – purchased 

You cannot recover any VAT on the purchase price unless the car is used 100% for business purposes. Travelling to and from work would invalidate a claim for 100% business use. 

VAT – leased 

You can recover 50% of the VAT on the lease charges. 

If the vehicle is used 100% for business purposes 100% can be claimed. As above, use of the car to travel to and from home would invalidate a claim for 100% business use.  

If you would like to discuss in more detail any of the issues raised in this article with a member of our team, please call 01772 741200