Tax breaks on Electric Vehicles
With the rise of fuel costs, the general increase in the cost of living, local authority levies on commuting, not to mention growing concerns over the impact of emissions on our climate, some of you may be considering an electric vehicle in the near future.
The use of electric cars in the UK is increasing. As at the end of Jun-22, the UK was the 5th biggest market in the world, and the 2nd biggest in Europe (behind Germany) for plug-in vehicles. There were 500,000 electric cars and 400,000 hybrid models on UK roads representing 21% of new car registrations. This demonstrates both an exponential growth in plug in vehicles and an overall decline in the sales of traditional vehicles.
Historically the country experienced a lag in the growth of it’s infrastructure behind that of it’s vehicle sales, but that gap has now closed with the increase in public charging points matching or in some places exceeding that of sales. With vehicle ranges improving and the practicalities of owning an electric vehicle becoming more realistic, this option is more viable than ever.
Because of the impact of petrol and diesel vehicles on public health and climate, naturally the tax system is being deployed to incentivise the use of electric vehicles, and I’m pleased to report that the breaks are appealing.
Benefits to Employers
Currently when a business purchases a petrol or diesel car (either outright or via a contract) it can only offset 18% of the cost of the vehicle per year against it’s taxable profits. Furthermore this is on a reducing balance method meaning the 18% is calculated on the cumulative value rather than the original purchase price. Consequently it can take many years before the full cost of the vehicle is offset.
Until 31 Mar 25, the government has agreed to allow 100% of the acquisition cost to be offset against taxable profits for all new fully electric car purchases. ‘Super deductions’ of 130% may also be available on the installation of electric vehicle infrastructure such as charging points.
For car hire or long term operating lease arrangements, the rental cost is also 100% tax deductible.
Currently there are no differences in rules around the recovery of VAT suffered on vehicle purchases and hire. Normally, 100% can be reclaimed on outright purchases and 50% reclaimed on contract arrangements, provided no personal use is offered to employees. VAT can be recovered on electric charging both at public charging points and private dwellings.
Employers can also offer employees electric vehicles via a salary sacrifice scheme (see below). This can benefit the employer by being able to offer attractive benefits to potential new talent, help achieve sustainability goals, and reducing employers NI bills.
Benefits to Employees
Where an employer makes a business car available to an employee for personal use, a taxable benefit arises both on the vehicle itself and the fuel use. The benefit is translated into a taxable value and included as an item usually taxed via form ‘P11d’.
This taxable value is a % (determined by it’s Co2 emissions) of the list price (including extras). As an example if a company were to make available a mid-range BMW 3 series to an employee, that employee would have to pay tax annually on a value of around £12,500 (31% of list price), meaning an additional tax liability of £2,500 or £5,000 for basic / higher rate taxpayers respectively.
The method by which the benefit is taxed remains the same for electric vehicles. However the % of the list price is vastly reduced. If a company opted to purchase a BMW i4 (with a similar list price to the petrol car) and make this available to an employee, that employee’s taxable value would be just £800 (2% of the list price). This would result in a tax liability of £160 or £320 respectively.
The 2% has been locked in by the Treasury until Apr 2025 on vehicles with ranges over 130 miles and with Co2 emissions below 50 g/km.
Another option open to employees is to lease a car from the employer via a salary sacrifice scheme. The distinction being that the car becomes the employee’s private vehicle rather than a fleet car made available for private use. The benefit here is that the cost of the lease is offset against the employee’s gross salary before tax is charged, in much the same way as pension contributions or the existing cycle-to-work scheme. The benefit in kind then being subject to comparatively small %, as per the above example.
For employers who do not currently have a provider, these schemes are operated by firms including BNP Paribas and Octopus Energy who are offering addons such as free supply and installation of home charging points, breakdown cover, and free mileage.
For small limited company proprietors who operate a ‘close company’, this can become an attractive proposition. Your Company could purchase, hire purchase, or simply hire an electric vehicle, with the full cost becoming deductible from your taxable profits in the first year. Your Company can then make the vehicle available to you for personal use, on which you would pay tax on just 2% of the list price of the vehicle. Salary sacrifice is not so suitable due to the small salary that small company directors pay themselves.
For limited company proprietors with larger teams, the benefits are as above with the added appeal of being a modern, conscientious business who can offer decent benefit packages to employees whilst being cost neutral.
For individuals, aside from the plentiful non-monetary benefits of owning an electric car, the tax incentives and fuel savings are such that you should notice a difference in your monthly spending power.
As usual any questions on todays musings let me know.
Have a great weekend!