The tax benefits of electric and low emission cars

The tax benefits of electric and low emission cars

Electric and low CO2 emission vehicles are becoming increasingly common on UK roads, as drivers seek to go green and reduce the costs of motoring.

Driving an electric or low CO2 emission vehicle helps to reduce airborne pollutants and CO2 emissions, but it could also help to reduce the amount of tax that a person or company pays.

With this in mind, we have produced a short guide that highlights some of the key tax advantages of using electric and low CO2 emission vehicles.

Electric cars for employees

If an electric car was provided to an employee as a company car, there are reliefs available that reduce the amount of tax payable on the use of the car as a benefit to the employee.

Company cars producing zero CO2 emissions attract a zero per cent Benefit-in-Kind tax rate, meaning businesses pay no company car tax on a pure electric car for that tax year.

The zero per cent rate also applies to hybrid vehicles that are first registered from 6 April 2020 that produce between one and 50g/km of carbon dioxide and are capable of at least 130 miles on battery power alone (but no such car exists).

These rates then increase to one per cent for 2021-22 and two per cent for 2022-23 for vehicles registered after 6th April 2020.

To ensure vehicles benefit from this relief businesses now need to provide the car’s zero-emission mileage, which covers the distance that the car can travel in miles on a single electric charge.

While there will be no change to the way company car tax data is reported, companies may need to provide additional information on the P11D.

To meet this new requirement for ULEVsfrom 6 April 2021 a new zero-emission mileage field will be shown on the P11D form (both online and offline), which will require a business to provide this new information.

This follows additional changes to banding for ultra-low emission vehicles (ULEVs), which has seen the introduction of 11 new ULEV bands and a separate zero-emissions band.

These latest changes are part of plans to move the calculation of company car tax and vehicle exercise duty over to the Worldwide Harmonised Light Vehicle Test Procedure (WLTP), instead of the New European Driving Cycle (NEDC).

Following this changeover, new cars first registered from 6 April 2020 will use CO2 emission figures based on WLTP, while cars registered before 6 April 2020 will use CO2 emission figures based on NEDC.

To take this additional change into consideration, from 6 April 2021 it will be mandatory to provide the date a car is first registered on the P11D form as well, via a field on the new online and offline forms.

Failure to obtain this data and report it accurately on the P11D form could lead to incorrect company car benefit in kind being calculated.

In addition to the benefit in kind tax charge, Class 1A National Insurance (NI) is normally payable by the business, providing a vehicle. The Class 1A NI rate is currently 13.8per cent, charged against the taxable benefit each year.

The Government recently confirmed that Benefit in Kind rates for all company cars for the tax years 2023-24 and 2024-25 tax year would remain at the 2022-23 levels.

Business tax relief

It is possible to get a full Corporation Tax deduction for purchasing a new electric car, or a new car with CO2 emissions of 50g/km or less if the car is used for business purposes.

If a company were to purchase a new electric car for £40,000, this would reduce the company’s taxable profits by that amount and result in a corporation tax saving of £7,600.

Businesses should be aware though, that if the car is later sold, an adjustment would be made in the tax computation equal to the proceeds of a sale.

In this example, if the business sold the same vehicle for £20,000 a few years later, there would be tax to pay of £3,800 at that point. The overall benefit would therefore be a saving of £3,800.

A 100 per cent first-year allowance (FYA), against taxable business profits, also applies for zero-emission vans, where the vehicle is purchased new and unused before 1 April 2021.

Unfortunately, if the electric or low emission vehicle is purchased second hand the Corporation Tax relief is less generous at 18 per cent per annum on a reducing balance basis.

This would mean that in year one the Corporation Tax saving on a £40,000 car would be £1,368, then £1,321 in year two and less each year after that until sold or written down to nil.

There would still be an adjustment when you sell the vehicle, but this would depend on how much relief has been claimed at the point the car is sold. This is still more attractive than the relief available for cars with higher CO2 emissions.

Vehicle Excise Duty

Zero-emission cars are exempt from the Vehicle Excise Duty ‘expensive car supplement’.

Before this, high-value electric vehicles costing over £40,000 would be subject to a £320 Vehicle Excise Duty supplement. It means that all fully electric cars are now exempt from Vehicle Excise Duty.

Plug-in grant 

If a company decides to buy an electric car for use in the business, then it can utilise the plug-in grant which can reduce the purchase price by up to £3,000.

Dealers will often highlight this during the sale of an electric vehicle to demonstrate the savings on offer. Further information about the grant can be found here.

Electric car charging points

Where a business installs a charging point before 2023, it can claim 100 per cent FYA tax allowances for the costs, against its taxable profits.

From 2018 there is no taxable benefit charged on employees, who use the charge point owned by the business, subject to other minor conditions.

To help with the costs of installing charging points, businesses can apply for the Workplace Charging Scheme. This provides support towards the purchase and installation of electric vehicle charge points. More details of this scheme can be found here.

There are also schemes available to support funding towards the charging point for the car where this is at a person’s home address. Details of this scheme can be found here.

We have provided advice to many clients on the tax benefits of electric and low CO2 emission cars. Please contact us to find out how we can help you take full advantage of these useful tax reliefs.

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