Electric car tax considerations for companies

By Andrew Neuman, Tax Director at Carpenter Box.

The government is aiming to encourage the use of electric car vehicle ownership to reduce the damaging impact of CO2 emissions on the environment. As part of their strategy, the government offers favourable tax treatment for the purchase and running of electric cars instead of conventional petrol and diesel vehicles.

Tax relief on car purchases

Companies are able to claim tax relief, via capital allowances, on assets purchased. Some assets qualify for 100% capital allowances in the year of purchase under the Annual Investment Allowance (AIA) or First Year Allowances (FYA). Traditionally, cars do not qualify for either of these allowances and tax relief is received at either 18% or 6% of the cost price per year, on a reducing balance basis.

Under current tax legislation, until 1 April 2025 (5 April 2025 for the self-employed and partnerships), the purchase of a brand new electric (zero emission) car will qualify for full tax relief as a FYA. Cars with CO2 emissions not exceeding 50g/km will be eligible for Writing Down Allowances (WDA) at the main rate (18%) while such cars with CO2 emissions exceeding 50g/km will be eligible for WDAs at the special rate (6%).

Assets qualifying for FYA do not reduce a business’s AIA entitlement which makes a FYA claim particularly attractive, especially when the AIA can be utilised for other qualifying plant and machinery purchased during the year.

The full cost price of the car will be deducted from the business’s taxable profit in the year of purchase. This will save Corporation Tax for your company at their marginal tax rate between 19% to 25% or at the marginal rate of 20%, 40% or 45% if you are self-employed.

Self-employed car tax

Private use of a vehicle which you use in your business will reduce the amount of capital allowances that can be claimed, by the business, on the cost of the vehicle.

Likewise, the running costs of a car will also be reduced by the proportion of time that it is used privately.

A travel log is recommended to record your business and non-business use of the vehicle to support your claim for tax relief.

Company car tax

Purchasing and owning a car via a company attracts a benefit in kind on the employee who has private use of the car. The company car tax calculation is based on the CO2 emissions and the list price of the car when new (including options).

As an extreme example, a high emissions sports car would attract a benefit in kind at a maximum percentage of 37%. This percentage is applied to the list price of the car when new – say £50,000 – giving a benefit in kind of £18,500. The employee is then liable to pay tax on this benefit at their marginal rate of tax of 20%, 40% or 45%. This would result in a personal tax liability for every year the car is owned by the company and used by the employee.

The company would also have to pay Class 1A National Insurance Contributions on the benefit in kind, at 13.8%.

Further to the Autumn 2022 budget, it was announced that the benefit in kind rates for zero-emissions electric vehicles would remain frozen at 2% through till 2024/25, however from 2025/26 this will raise to 3%, to 4% in 2026/27 and 5% in 2027/28. From April 2025, zero-emission vehicles will lose their vehicle excise duty exemption.

If you were to opt to purchase the vehicle personally, you would need to fund this from personal cash reserves or take out personal finance. If you are a shareholder in the company concerned, it could be possible to take a dividend from the company to acquire the vehicle. The amount of dividend taken to purchase the car personally would be taxed at your marginal rate of tax of 8.75%, 33.75% or 39.35%. Depending on the cost of the car, the overall level of the dividend required could potentially reduce, or eliminate, your tax-free personal allowance.

Electric charging points

The cost of a brand-new electric charging point, incurred before 31 March 2025 also qualifies for full capital allowances tax relief as a first year allowance (FYA), saving the company Corporation Tax at their marginal tax rate between 19% to 25%.

For a company employee there is no personal benefit in kind charge for a parking space, or the use of charging point provided to you at the workplace. This is regardless of private use, which is different to the treatment of CO2 emitting cars which are subject to additional benefit in kinds taxable on the employee (and subject to Class 1A National Insurance) for private use of fuel paid for by the employer.

Should the employer pay to have a charging point installed at an employee’s home:

• If the car concerned is the employee’s personally owned car, then a benefit in kind would arise, equivalent to the cost to the employer of providing the charge point (including any VAT).

• If the car concerned is a company car, no benefit in kind will arise in relation to the provision of the charge point.

The company may qualify for a grant towards the purchase and installation of an electric car charge-point at work under the voucher-based Workplace Charging Scheme.

In addition, you may also be able to receive a grant towards the cost of a smart charge point installed at your home.

How we can help

There are currently a number of tax reliefs available for the purchase and use of electric and low emission vehicles, which make them an attractive option to acquire through a business However, the timing of purchases can have a considerable impact on the amount of relief available.

If you are interested in finding out more, please get in touch with our tax team on 01903 234094 or visit www.carpenterbox.com