Should your next company car be electric?

Buying an electric car through your limited company can provide significant tax benefits. You can use capital allowances to reduce your Corporation Tax bill. Until 31 March 2024 there’s also a grant for installing a charging point at your premises. However, electric vehicles (EVs) have a higher capital cost in most cases. 

 

To make the best choice you’ll need to know a vehicle’s CO2 rating, vehicle range and full retail price. If there’s an element of personal use you will need to consider the implications for benefit in kind tax. 

 

Capital allowance. If your limited company buys a brand new fully electric car, you can claim a First Year Allowance of 100% against Corporation Tax. If you buy a second-hand fully electric vehicle there’s a lower rate capital allowance of 18% per year. This applies to new or second-hand vehicles with CO2 emissions of 50g/km or less. 

 

The capital allowance applies when vehicles are bought by the company or via a hire purchase agreement. It won’t apply when the company doesn’t own the vehicle under a lease agreement. However monthly payments can be treated as expenses along with maintenance and insurance costs. 

 

VAT. To reclaim VAT on your company car purchase it must be exclusively for business use. Even driving to and from work would be regarded as personal use, so VAT couldn’t be reclaimed. If you lease a company car VAT is normally charged on the monthly lease payments. You can recover 50% where there’s personal and business use and 100% for business use only. 

 

Employers National Insurance. Whatever the BIK tax for an employee, if they earn over £175 per week employers pay Class 1 National Insurance at 13.8%. 

 

Employers’ responsibilities. Your company must tell HMRC that an employee uses a company car privately and provide a P11D BIK form to the employee. 

 

Previously tax benefits based on CO2 emissions made diesel vehicles a cost effective choice. However, with plug-in hybrid vehicles (PHEVs) part of a journey can use only electricity, reducing fuel costs and tax bills. Battery only electric vehicles (BEVs) reduce tax even further but can involve compromises on range and charging. 

 

Electric cars. An electric company car is the most tax-efficient option. The BIK tax for zero-emission vehicles (ZEVs) is 2% until the end of the 2024/25 tax year. However, HMRC wants to remove this tax incentive as soon as possible when more people are using electric cars. 

 

From April 2025 zero emission cars registered on or after 1 April 2017 will pay the lowest first year rate of vehicle excise duty (VED). From the second year of registration the standard annual rate of £180 will apply. The exemption from the Expensive Car Supplement is due to end in 2025. This currently applies to vehicles with a list price of £40,000 or more. 

 

Depending on your business needs there are many electric cars that travel for 200 miles on a charge. If you can charge at home or at work, travel costs are reduced although fast public charging is still expensive. However, there are long waiting lists for some models and the cost might be outside your budget. Depending on your mileage you’ll also need to decide whether you can justify several charging stops during the working day. 

 

Hybrid and plug-in hybrid cars. There is a wide choice of hybrid cars and PHEVs. Hybrid cars use otherwise wasted electricity as you travel while PHEVs need to be recharged to operate efficiently. They help to minimise the ‘range anxiety’ some people feel about all-electric cars. PHEVs generally emit less CO2 and have a lower company car tax band than cars with combustion engines. 

 

Diesel cars. Diesel cars aren’t as popular as they once were. However, the modern ones must meet the strict Real Driving Emissions Step 2 (RDE2) standard. Of course, refuelling is easy but costs for diesel have increased a lot recently. Diesel cars are still a good option for high-mileage drivers. RDE2-compliant diesel vehicles aren’t subject to the 4% tax surcharge that applies to less efficient diesel cars. Most will also use less fuel than hybrid cars on longer journeys. However, your tax bill is higher and there will be emissions. 

 

Petrol cars. Petrol-powered cars aren’t a good choice for most company car drivers due to high tax bills and fuel costs. In most cases, electric cars or PHEVs are more cost-effective options. Some petrol cars offer good fuel economy and are often easier to drive in urban areas. However, their emissions are the highest, they will use more fuel on long journeys and the BIK tax is higher. 

 

Choosing an all-electric or hybrid option will make a big difference to company and personal tax bills. However, for high business mile drivers, a diesel car might remain the best option for now. You can use the company car and fuel benefit calculator to work out what you might pay.