Reasons to purchase an electric vehicle through your company
Previously, having a car provided to you though your own limited company, or having a vehicle provided to you by your employer, may have seemed too costly to consider, as the personal tax burden can often outweigh the corporation tax saving generated. This is due to the fact that any benefits provided to an employee are taxable as a benefit in kind (BIK) and will be subject to income tax. However following the introduction of the new BIK rates applicable to electric vehicles, then from April 2020, you may want to reconsider.
Due to their lower emissions, electric and plug in hybrid vehicles are taxed at a lower BIK rate in an attempt to encourage drivers and companies to choose these types of vehicles, which produce less harmful emissions. The tax savings can be huge, and for the 2020-2021 tax year a fully electric vehicle will carry a BIK rate of 0% compared with the highest rate of 37%! This means that there will be no personal tax liability in respect of a fully electric vehicle.
When you also consider the Corporation Tax savings generated by the purchase of an electric vehicle, 100% First Year Allowance (FYA) giving full tax relief against the cost of the car in the year of purchase, as well as the grants and other incentives offered to purchasers of electric vehicles, it is easy to see why this may be not only be a beneficial move to make for the environment, but also for the tax savings that this change can generate.
What influences the tax rates?
In order to understand how any tax savings may come about, we first need to understand how the vehicle will be taxed. The personal tax you pay on your company car depends on several factors including the following:
• The list price of the vehicle;
• The CO2 emissions produced by the vehicle;
• The type of fuel used by the vehicle; and
• If the company pays for fuel.
How standard car benefits are taxed
If a company provides an individual with a car, then the individual will be taxed on the benefit that they have received from the company. The way the amount of the benefit is calculated is by taking the list price of the vehicle and multiplying it by a fixed rate percentage, which is based on the emissions and fuel type of the vehicle which can be up to 37% of the list price of the vehicle.
If the company also provides fuel for personal use to the individual, then this is also taxable in a similar manner, however instead of taking the list price of the vehicle multiplied by the percentage it is instead multiplied by a fixed amount set by HMRC which for the year ended 5 April 2020 will be £23,400.
How electric cars are taxed
Similarly to non-electric vehicles, the list price of the electric vehicle is multiplied by a set percentage based on the emissions of the vehicle. For the 2020-21 tax year this percentage is set at 0%, effectively eliminating the value of any benefit. Subsequently this will rise to 1% and 2%, for the 2021-22 and 2022-23 tax years respectively.
In relation to fuelling the vehicle, the electricity used to power the vehicle is not classified as a fuel under the car benefit regulations, and therefore any electricity used to recharge the vehicle at the business premises is not a taxable benefit for the individual and is still tax deductible from your company’s Corporation Tax bill.
Savings for the individual
The amount of the benefit calculated is added to your salary and taxed as employment income on your tax return. Due to the common remuneration structure of drawing a low salary and high dividends for directors it is likely that you will find that you will not pay tax on your salary, and you will still have roughly £4,000 of your personal allowance available before you pay basic rate tax at 20%. This means that you could have a £80,000 Tesla Model X and pay no income tax in respect of this vehicle, however you would face a personal tax liability of almost £1,000 for a Nissan Qashqai with a list price of £25,000!
For employees, with the benefit in kind rate to be set at 0%, then you will not pay any income tax in respect of your company car in 2020-21. Even in the 2 years following, any tax payable will be minimal, especially when compared with a non-electric vehicle.
Savings for the company
If the company purchases the electric vehicle, either as a cash purchase or by way of a hire purchase arrangement, then in the first year of owning the car the company can claim First Year Allowance (FYA) in respect of the vehicle, which means that the entire cost of the vehicle will be able to be deducted from your profits for the year (ignoring any adjustment for private use), immediately saving Corporation Tax at 19%. It is worth noting that the VAT element on the purchase of a new vehicle is irrecoverable and cannot be reclaimed in your quarterly VAT returns.
Alternatively, the company may choose to lease a vehicle, in which case 50% of the VAT will be recoverable as well as the entire of the net expense being allowable as an expense for Corporation Tax purposes.
When the benefit is calculated using the list price and the BIK rate, this amount will need to be recorded on a P11d form and Class 1a National Insurance will be payable on this benefit at a rate of 13.8%, however this payment is also allowable as an expense for Corporation Tax.
In addition to the above tax savings, the Government is also offering grants towards the costs of the vehicles and also towards the cost of installing charge points in your place of work, further reducing the costs of electric car ownership.
Due to the new rules and rates introduced in July 2019 then it is clear that there is an attempt to incentivise employees and companies into considering electric vehicles when looking at their company car options.
If you have any queries, or want us to prepare a detailed illustration as to how an electric vehicle could generate tax savings for your business, or how it could be beneficial to you as an employee, then please do not hesitate to contact us.
A new Nissan Leaf Acenta 40kWh Auto has a list price of £31,495 and emits 0g/km of CO2, putting it in the lowest tax bracket for benefit in kind.
In 2020-21, the BIK value will be £31,495 x 0% = £0
In 2021-22, the BIK value will be £31,495 x 1% = £314.95 on which tax will be paid at your marginal rate. As a basic rate taxpayer, the monthly cost of this would be £5.25.
In 2022-23, the BIK value will be £31,495 x 2% = £629.90 on which tax will be paid at your marginal rate. As a basic rate taxpayer, the monthly cost of this would be £10.50.
It is clear from this illustration that the low BIK rates make an electric vehicle a very attractive option, but the advantages become even more striking when compared with a non-electric vehicle:
Comparison of Electric vs Non Electric Luxury SUV from April 2020
|Tesla Model X|
|Porsche Cayenne Turbo|
|Higher Rate Taxpayer|
2020-2021 Monthly BIK Cost
x 0% x 40% / 12
x 37% x 40% / 12
|2021-2022 Monthly BIK Cost|
x 1% x 40% / 12
x 37% x 40% / 12
|2022-2023 Monthly BIK Cost|
x 1% x 40% / 12
x 37% x 40% / 12