Should I buy an electric company car?

If you’re looking to upgrade or invest in a company car, the good news for your wallet and the planet is that the Benefit in Kind tax rate is currently 1% for fully electric cars. Read on to find out why going electric is likely to be the best bet for your business.

If you live in an urban area, you might have noticed what the air tasted like when people were released from the first lockdown and car use increased en masse. Nasty! We all know about the evils of diesel and petrol engines for our health and the environment, but from a tax perspective, an electric company car is also generally going to be the best choice. You’ll save on tax, fuel and both the congestion charge and soon-to-be-extended ULEZ zone charges if you drive in London.

That said, an electric car isn’t always the right option and they do have a few drawbacks. They’re a fair bit more expensive to buy, insure and service, tend to lose their value quicker and can’t compete with the gas guzzlers on range. If you do a lot of long distance trips then a 100% electric vehicle might not be the best option for you. 

How does buying a company car work?

A company car is owned by a business and provided to an employee for their use. It is a taxable Benefit in Kind, meaning a company car is classed as a benefit which employees or directors receive but is not included in their salary. They’re taxed to stop people sneaking a hefty tax reduction on cars they’re intending for personal use. So, individuals pay income tax on company cars and companies pay national insurance on that income tax. 

A look at the tax liabilities 

How much you pay in tax depends on the income of the employee/director who will be using the vehicle and the CO2 emissions and cost price of the car. The more polluting the car, the higher the tax. Here’s an estimate of how the Benefit in Kind rates could apply based on a 20% basic rate taxpayer and a £30,000 car. They’re just a guide – the rates can go as high as 37% for the dirtiest vehicles.

Vehicle type 2020/2021 2021/2022 2022/2023

Electric vehicle, first registered after 6 April 2020

0%
1%
2%
PHEV, 29-mile EV range, CO2 = 44g/km, first registered after 6 April 2020
12%
13%
14%
Petrol, first registered from 6 April 2020, CO2 = 137g/km
30%
31%
32%
Diesel, RDE2 non-compliant, first registered from 6 April 2020, CO2 = 120g/km
31%
32%
33%

So, in 2021/2022, a diesel company car that is RDE2 non-compliant will attract a 31% tax on the value of the car. A basic rate taxpayer will need to pay 20% of that amount in income tax and the employer will be liable for National Insurance contributions on that income tax at 13.8%. On a £30k car, that would mean annual costs of the following:

Diesel

  • Benefit in Kind tax – 31% of £30,000 = £9,300
  • Income tax for the individual – 20% of £9,300 = £1,860
  • NI contributions for the employer – 13.8% of £1860 = £256.68

At the moment, there is £0 cost to the employee and company. Even at the 2% tax rate for electric vehicles that will be introduced in 2022, buying an electric car would equate to a much smaller tax bill:

Electric

  • Benefit in Kind tax (2022 rate) – 2% of £30,000 = £600
  • Income tax for individual – 20% of £600 = £120
  • NI contributions for the employer – 13.8% of £120 = £16.56

As you can see, it’s a much cheaper proposition for everyone and that’s before you take into account the cheaper fuel costs for electric vehicles. And when you throw in the benefits to our communities of having fewer polluting vehicles on the roads, it’s definitely worth taking a serious look at electric vehicles. Get in touch if you’d like to talk through the options and tax liabilities with one of our team. 

If you have any questions about buying an electric car for your business, get in touch on 0203 026 4679 or at hello@iammoose.co.uk.

This article is a general summary only. It should not replace accounting advice tailored to your specific circumstances.

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