Go electric to reduce your tax “charge”?

By Paul Brown, Tax Partner

With the latest rules saying that pure new petrol or diesel cars will no longer be sold in the UK by 2030 more people are turning their minds to the question of whether they should go electric with their next car purchase.

For business owners and company car users there are significant tax benefits to be had from going electric, particularly as the choice of models available grows.   The Government continues to support tax incentives for electric cars even as it reduces the availability of grants toward the cost of purchasing them.

Employee benefits

When an employee is provided with a car by their employer which they can use privately, they are taxed on a benefit in kind.  The amount of the benefit is determined by the list price of the car multiplied by a percentage which is determined by reference to the CO2 emissions of the vehicle.  For diesel or petrol cars this percentage is never lower than 15% although lower rates are available for low emission hybrid vehicles depending on the electric only range of the car.

Contrast this to a pure electric vehicle.  In the current (2021/22) tax year the benefit in kind percentage for a pure electric vehicle is 1% of the list price (2% next year).  Thus for a £30,000 petrol vehicle the lowest benefit in kind possible is £4,500 – annual tax of £1,800 for a 40% taxpayer.  A similarly priced electric vehicle has a benefit in the current year of £300, saving that 40% taxpayer £1,680 in tax this year. 

In a similar way if an employer provides fuel to an employee which they use for private purposes then this is also a taxable benefit in kind.  In contrast, if an employer allows an employee to charge their electric company car at work then no benefit in kind arises (the position is slightly different when the employee charges their own electric car at work).

Not only is this attractive for the employee but it also reduces the employer’s tax bill.  The benefit in kind taxed on the employee is also subject to the employer’s National Insurance Contributions – so the lower the benefit the lower the NIC cost to the employer.

Income/corporation tax savings

A car which is purchased by an employer attracts capital allowances to be offset against the employer’s taxable profits.  A petrol or diesel car with emissions of up to 50g/km (so broadly hybrids only) purchased on the current financial year will attract capital allowances at a rate of 18% per year, while cars with emissions over that level receive a writing down rate for tax purposes of 6% per year.  Contrast this with the position for a new (not used) car with zero emissions where the full cost of the vehicle can be deducted against profits in the year the car is purchased.  For a £30k car with emissions of 51g/km the first year corporation tax saving is £342 the first year whereas a zero-emissions car gives a tax saving in year one of £5,700.

Many employers lease their vehicles.  For a car first leased in the current financial year, the lease cost is fully tax-deductible for cars with emissions of 50g/km per kilometre or less, while there is a 15% restriction for cars with emissions over 50 g/km. 

Salary sacrifice

Salary sacrifice is an arrangement where an employee agrees to give up a part of their cash salary in exchange for a non-cash benefit provided by an employer.  Until a few years ago salary sacrifice arrangements for lower emissions cars were relatively popular due to their tax efficiency until the rules were changed to take away the advantages.  However, it is still possible to salary sacrifice for a zero-emissions car whereby the employee gives up an agreed amount of their salary in exchange for an employer provided zero-emissions car.  This can result in significant tax savings for both the employee and employer and while the arrangements are not for everyone in the right circumstances they can prove to be a real incentive for employees, especially in situations where recruitment and retention are proving challenging…

The days of the pure diesel or petrol vehicles are numbered as a matter of law while the technology and infrastructure for all-electric cars continue to improve apace.  Any employer who currently provides cars for their employees, or any employer facing recruitment or retention issues should certainly consider electric vehicles as an alternative to the more traditional fleet model.  The equation is not always a simple one, but the current raft of tax benefits attached to such vehicles can be enough to swing the cost/benefit analysis firmly in favour of going electric…