If you’re in the market for a new company car, now’s the time to consider going electric. HMRC are keen on helping taxpayers reduce their “carbon tyre-print” and have introduced a range of tax measures designed to help employers and employees make the switch to electric vehicles.
However, these tax allowances are only set in stone until 2025; so if you’re looking for fleet replacement vehicles, it’s key to plan ahead. Right now, switching to electric is a smart financial decision – let’s break down how.
Company car tax
Traditionally, the tax rules for company vehicles haven’t been particularly tax-efficient, but electric is changing this. If your employer provides you with a fully-electric vehicle, the amount of company car tax, or benefit-in-kind (BiK) rate is just 2% of its list price including accessories (P11D) for the 2022/23 tax year, and will stay at this rate throughout 2023/24 and 2024/25. This compares to 37% at the opposite end of the emissions scale – so there’s a big difference.
To work out how much BiK you owe, you’ll need to multiply the P11D value of the car x BiK tax band x your income tax bracket. So, an electric Peugeot with a P11D value of £20,000 x 2% BiK rate x 20% tax bracket would come to £80 BiK per year. In comparison, if we take the petrol-run Peugeot 208 1.2, the BiK would cost approximately £1056 annually. To put it simply, choosing a zero-emissions plug-in vehicle over the equivalent petrol or diesel vehicle can save you a pretty hefty amount!
An added benefit of providing an electric car is that paying for a charger at work will qualify for additional allowances and no tax for the employee. If a company pays for a charging point before 31st March 2023, they can claim 130% of the cost against their taxable profits (e.g. if the charging point costs £1,000, they can claim an additional £300).
Salary sacrifice
A great way to save even more with an electric car is by using a salary sacrifice scheme, where an employee gives up a portion of their salary and in return, receives a benefit. You’ve probably heard about salary sacrifice in the context of pensions, childcare vouchers, or the cycle-to-work scheme – but you can also use it to make an EV more affordable. In the case of electric vehicles, the scheme allows an employee to pay for their car each month using their gross salary, before deductions are made for tax and other contributions.
With salary sacrifice for an electric car, as an employee you’re not taxed on the salary you give up (you just have to ensure you pay BiK). This is why EV salary sacrifice schemes are such an attractive way of delivering a tax-efficient, zero-emission benefit to staff. In most cases, it benefits the employer, too; generating monthly NIC savings and improving staff satisfaction, alongside reducing your company’s carbon footprint.
Capital allowance
Another employer benefit when it comes to EVs is enhanced capital allowance. An electric car qualifies for a 100% first year allowance (FYA) if purchased new prior to April 2025, meaning the full cost of the new car can be deducted from your company’s pre-tax profits. It needs to be purchased outright, or financed through hire purchase or contract purchase to qualify. There’s also a government grant of £2,500 you can deduct from the price of an electric car costing less than £35,000. With long lead times for new cars, you might be tempted to buy second-hand – but it’s worth keeping in mind that only new and unused cars will qualify for first year allowances, so you’ll save a lot more in the long run if you plan in advance.
Road tax
An added bonus of updating your company car or van with an electric vehicle is reduced road tax. Rates of road tax, or Vehicle Excise Duty (VED) are based on CO2 emissions, so the more harmful the vehicle, the more you’re taxed. If you own an all-electric vehicle, powered purely by a battery, it will be exempt from paying both first year and standard rate VED, which means you won’t pay a penny. Plug-in hybrids (PHEVs) are subject to a reduced rate VED, whilst plug-in hybrids that cost £40,000 or more are subject to a premium rate for 5 years (starting from the second time the vehicle is taxed).
However, in the Government’s recent Autumn Statement, Chancellor Jeremy Hunt announced that electric vehicles will begin paying VED from 2025 – so now’s the time to take advantage of these tax benefits. Under the plans laid out on 17th November, electric cars registered from April 2025 will pay the lowest rate of £10 in the first year, then move to the standard rate which is currently £165. Mr Hunt said this was being done to create a “fairer” system of motoring tax.
How can we help?
As we move inevitably towards the 2030 ban on new petrol and diesel cars, EVs are pretty much guaranteed to take a greater market share. So, with many incentives due to expire in 2025, there’s never been a better time to consider charging ahead with the switch to electric.
If you have any queries around salary sacrifice schemes, or require our assistance in reviewing the benefits you provide to your employees, please contact a member of the team at tax@haroldsharp.co.uk or call 0161 905 1616.