As claims of an impending electric vehicle “crisis” surface following the government’s decision against reinstating grants for plug-in cars, understanding the evolving tax implications of electric vehicles (EVs) is crucial.
This week’s Tax Tuesday explores the current and anticipated tax incentives for EV owners and outlines why employers should consider offering electric vehicles through salary sacrifice schemes.
Current Electric Vehicle landscape
Despite the government’s commitment to affordable EV transition, there are concerns about the lack of additional incentives to aid EV access and mitigate higher charging costs.
While the government aims to focus incentives where they have the most impact, including motorcycles, vans, and taxis, concerns remain regarding barriers to charging accessibility and VAT differentials between public and domestic charging.
Currently, employees opting for electric company cars over traditional petrol or diesel vehicles can realise considerable savings on income tax. This is due to the benefit-in-kind (BiK) rate for electric cars being set at 2% until April 2025, with planned incremental increases of 1% annually until 2028. In stark contrast, the BiK percentages can reach up to 37% for petrol cars and 41% for diesel cars.
EVs are currently exempt from vehicle excise duty (VED) however, as of 1 April 2025, zero emission cars first registered on or after 1 April 2017 will be subject to the lowest first-year rate of VED (currently £10), similar to vehicles with CO2 emissions of 1 to 50g/km. Additionally, the Expensive Car Supplement exemption for EVs is set to end in 2025.
Current and prospective owners of electric vehicles may find it beneficial to take advantage of the exemption before its expiration next year. By registering their zero emission vehicles before the implementation of the new VED regulations, owners can benefit from the current tax incentives, potentially saving on vehicle ownership costs in the long run.
Why employers should consider incentivising electric vehicles through Salary Sacrifice
As an employer, it might be timely to consider incentivising your employees to switch to EVs via salary sacrifice. This is an attractive option for both employee and employer.
Typically, an employer would acquire an electric car, under a lease agreement, and supply that electric car to their employee. The employee would lease the EV in exchange for a portion of their gross salary.
The amount sacrificed would typically cover the lease payments of the vehicle. Since this amount is deducted from the gross salary (before tax and National Insurance), employees save money by reducing their taxable income.
Offering EVs in this way makes them an accessible option for employees, enhancing a company’s overall benefits package and aiding in talent retention.
Plus, financially, employers benefit from savings on both the salary costs and the reduced National Insurance contributions, while also reinforcing their commitment to corporate social responsibility by supporting environmentally friendly practices.
How can we help?
The tax landscape for electric vehicles is rapidly evolving, influenced by both government policy and economic incentives. While the immediate future presents challenges, the ongoing development of incentives and the strategic advantages for businesses suggest potential for growth in EV adoption.
Please contact your relationship principal, email tax@haroldsharp.co.uk or call 0161 905 1616 if you’d like to discuss.
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