The UK Government has declared that petrol, diesel and even some hybrid vehicles will be banned from UK roads by 2040 as part of a commitment to meet the net zero emissions target. As part of the wider plan, several tax breaks have been implemented to encourage companies to opt for electric cars and electric rentals over combustion engine vehicles. Uncover the key takeaways and tax breaks on electric cars below.
Electric cars and capital allowances
Capital allowances are the tax-deductible claims for the declining value of an asset, also known as asset depreciation. The cost to buy a brand-new or used electric vehicle for a business purpose is eligible for 100% First Year Allowances (FYAs) in the same year the cost is incurred. This rule has been introduced to stimulate a take up of electric vehicles among businesses – and will remain in place until April 2025.
A business is allowed to claim less than the 100% FYA. In these situations, the outstanding unclaimed balance will be rollover and qualify for future Writing Down Allowances (WDAs) at 18% per year.
The running costs of an electric vehicle, such as electric charging, are 100% deductible against business profits to mitigate tax liability. If an electric vehicle is leased for business purposes rather than purchased outright, the leasing costs of the vehicle are fully deductible.
Hybrid cars and capital allowances
Capital allowance rules for hybrid electric-fuel cars are based on updated rule changes as of April 2021 that look at the CO2 emissions of the vehicle. As of April, a hybrid car only qualifies for 100% FYAs in its purchasing year if it is a zero-emissions hybrid vehicle.
If the hybrid car has a CO2 emissions range under 50g/km, then it qualifies for annual WDAs at 18% within the capital allowance pool. Hybrids that are less environmentally friendly with CO2 emissions over 50g/km will only benefit from 6% annual WDAs within the special pool.
Employee electric car tax breaks
When employers provide their employees with company cars that can be used privately, such as on weekends for family trips, the car is considered a taxable benefit in kind (BIK). The employee will have to pay a BIK charge on their ability to use the company car for non-work-related reasons.
The amount of BIK payable is subject to a semi-complex calculation looking at the value of the vehicle, its battery, registration date and CO2 emission rating. Interestingly, the employer providing the car to the employee will also have to pay National Insurance Type 1A on the BIK amount.
However, there is a BIK payment holiday for anyone using a fully electric company vehicle for personal reasons during the current tax year. During the whole of the 2020/21 tax year, no BIK is charged on any electric vehicle. Simultaneously, the employer does not need to pay National Insurance because there will be no BIK owed. This does not apply if the vehicle is a hybrid electric-fuel company car.
Although the zero Bik rate ceases at the end of the current tax year, it will only rise to 1% in the following tax year and 2% in the one thereafter. These are exceptionally low BIK rates in comparison to standard company cars with a combustion engine. In contrast, a car with a high CO2 emissions rating could incur a BIK charge of around 37%.
Example of an electric car BIK payment
If a company was to purchase a small electric car for the company’s CEO costing £35,000 within the current tax year, the CEO would not owe any BIK, and the company would owe no National Insurance.
If the CEO continued to use the electric vehicle for personal reasons in the following tax year, they would be required to pay BIK at 1% of the car’s purchase price, equating to £350 (£35,000 / 100). And in the following year, they would need to pay 2%, equating to £700.
Should I buy an electric company car?
For more help understanding the company and personal tax breaks of buying company electric vehicles, speak with Yorkshire Accountancy. We can walk you through the finer details to help you make the best choice for your business.