Should you buy an electric car through your company?
Changes to tax bands mean that an electric company car is suddenly an attractive option for small business owners, but it may offer more tax benefits than you think.
A company car used to be one of the most popular employment perks available, but time and tax saw it go out of fashion. However, thanks to recent changes from HMRC, it could make a whole new comeback, as long as you’re happy to go electric.
Electric cars are set to explode in popularity over the next decade. Deloitte predicts the market will grow at a compound rate of 29% between now and 2030. The government sees the move to electricity as a key component of its drive to reduce emissions.
As part of that strategy, last year they cut the benefits in kind tax for electric company cars to zero. That rate will soon rise, but even so they offer a great deal.
How company cars are taxed
Company car tax comes in several parts: what the company pays and what the employee pays. The car will have a taxable value based on its value, benefit in kind tax and its emissions.
Employees will have to pay an income tax on this value, depending on what band they are in. Basic rate payers will pay at 20% while higher rate income taxpayers will have to pay at 40%. The calculation for employee tax will be (P11D value) x (BiK band) x (tax bracket).
The company, meanwhile, will also have to pay national insurance contributions on the car.
Benefits in Kind tax comes in various bands. The higher the Co2 emissions, the higher the band. Until April last year, electric cars were subject to 16% BIK tax. So, if you have a car worth £30,000, the taxable value of the car would be £4,800. The employee would pay income tax on this depending on which band he or she is in.
However, from April last year benefits in kind tax for electric cars dropped to zero percent. That means you could provide a company car with no BIK tax at all. From April 2021, BIK will rise to 1%, and from 2022, to 2% so there will be something to pay. However, it will still represent an extremely good deal for both sides.
We do not yet know what the tax bands will be beyond then. However, the government has committed to providing information on new BIK tax bands two years in advance, “to provide certainty for employers, employees and fleet operators.”
If you give an employee a van for personal use, he or she will be liable to a ‘van benefit charge’. For normal vans this is £3,490 but it electric van drivers will only pay 80% of that charge.
As for plug in and other hybrids, their BIK will depend on how far they can be driven in low electric mode as well as their CO2 emissions. Some of the more popular hybrid company cars can manage between 30 and 39 miles alone, which means they will attract BIK at 10%. Those which can go further (40 to 49 miles) will see that rate fall to 6%.
This is a little more than pure electric cars but a long way off the rates of 37% you’ll see from some of the biggest producers of CO2.
Hybrids will also have the added benefits of reducing your reliance on the nascent plug in network. Electric cars may be becoming more popular. However, the market is still in the early stages. Many electric cars will have a limited range and even this can fluctuate depending on real world conditions, such as weather, type of terrain and how many people in the car.
Often, you’d have to be driving on a perfect day with nobody in the car in only your underwear to achieve the advertised range. There are also concerns about the resale value of electric cars thanks to the life of the battery and the difficulty involved with finding new ones.
Added to that, the electric plug in network is very much a work in development. In practical terms going electric still comes with a number of logistical challenges. In the short term, hybrids may offer a more flexible option which still has a low tax but allows you to venture out without knowing where the local petrol station with a plug in point can be found.
Corporation tax savings
In addition to the benefits we’ve already listed, you may enjoy some corporation tax savings. Some low emissions cars are available for 100% first year allowance which means you can use the purchase of the car to reduce the profits of your company and save corporation tax. You may also be able to lease the car and use the lease payments to offset against profits and reduce corporation tax liability.
Looking to the future
Electric cars do come with plenty of practicality challenges. However, from a tax point of view, they can be extremely useful. Although tax rates are likely to rise in coming years as electric cars become more common, they still represent a much cheaper option than cars using petrol or diesel.
As we move into the future, the technology surrounding electric cars will improve. That means greater range, improved efficiency and a longer battery life. At the same time, the electric infrastructure is also expanding. While it can be difficult to rely on a car’s range and find a plug in point today, that will be less of a problem as time goes by.
Depending on your situation, therefore, an electric company car can be a great option. As always, you should examine your requirements and situation to decide if it’s usable or practical enough for you. If you are a business owner and need accounting and tax advice on purchasing an electric car or plugin hybrid, feel free to contact us today.