Tax Rules on Electric Vehicles: A Brief Guide

Kirsty Young Tax

Before we start, a quick note.

This 2022 guide to tax rules on electric vehicles is primarily for limited companies, although we cover the key points for sole traders in the FAQ below. It’s also aimed at small businesses, where generally the owner and the director are the same person.

If that’s you, read on!

What are the general car rules?

Traditionally the tax rules for company vehicles have been not very tax efficient (i.e. bad) but electric is changing all that (good!).

If your company buys or rents a car and provides it to you, you might be looking at paying personal tax on it. This could be up to 37% of the LIST price of the vehicle, regardless of its age when you actually get use of it. This is because you have received a ‘benefit in kind’.

The exact percentage of the car’s price you pay tax on is determined by the CO2 emissions and fuel type.

If the company fuels the car, you can also pay tax on over £9,000 for that privilege depending on the CO2 emissions. This applies even if the cost of the fuel doesn’t amount to that.

It’s also worth noting that there is another cost involved, as the company pays over 15% (at the time of writing) when providing this ‘car benefit’ to you.

Swings and roundabouts

As you can see, it can be expensive for a company to pay for and provide you with a car!

However, it’s not all bad news as the company gains a tax deduction on the costs of the car, reducing your company tax bill. However, when you add in the other taxes in play, it is often not cost effective?? for owner-managed businesses.

If you are after a bedtime read, the HMRC guidance on company cars is lengthy and a cure for insomnia…

Are electric cars good from a tax point of view?

Compared to petrol and diesel vehicles, electric cars are usually very good because of their low CO2 emissions. Buying electric brings two major benefits:

1) There are usually some great tax reliefs on the cost of the car.

2) Allowing the employee/director to have use of the car is very cheap tax-wise, in terms of the ‘benefit in kind.’(??)

Let’s take the best -case scenario. You can get tax relief up to 100% of the cost of the vehicle in the year you buy it. After that, you continue to get a ‘benefit in kind’ charge of only around 2% per year (compared to up to 37% for non-electric vehicles!).

An electric car also doesn’t use “traditional” fossil fuels, so you don’t have to pay the ‘fuel benefit charge’ on up to £9,000.

Exactly how much you can save depends on a few factors which we cover below.

Common questions about electric vehicles and tax

– How much personal tax will I pay on the use of a car?

You will pay some tax as you have received a “benefit in kind”. As discussed above, the amount of tax you will pay depends on the CO2 emissions of the vehicle. Generally, vehicle emissions of under 50g/km is a good value to aim for, with zero emission electric being the best.

At the time of writing, the best ‘benefit in kind’ rate for cars is 2% of the list price (including accessories etc).

So, if the list price of your vehicle was £50,000:

2% x £50,000 = £1000 benefit.

You would then pay tax on that £1000, at a rate depending on your other income/salary (will likely be 20%, 40% or 45%).

– Does the car need to be brand new?

No, BUT to get the best allowances against the cost of the car, then yes. The 100% ‘first year allowance’ is for new, unused electric or zero emission cars. This allowance allows you to offset the entire cost of the vehicle against your profits in one year, with can have a big positive impact on the amount of tax you might have to pay.

If you buy a used car with Co2 emissions under 50g/km, you still benefit from what is known as ‘main rate capital allowances’. At at the time of writing, this is effectively 18% tax relief a year on the purchase price.

This type of tax relief is known as ‘Capital Allowances’, and you can see what type of allowances are available on HMRC site here.

– Do I need to purchase the car outright to get the relief on the cost?

Yes and no. You need to effectively ‘buy’ it, so you can’t lease it if you want the relief on the value of the vehicle. However, something like a loan or traditional hire purchase agreement will generally count as buying it for the purposes of the tax relief. If in doubt, check with your accountant/tax advisor.

– What happens if I lease the car?

Most lease agreements include a monthly charge plus VAT. By leasing your car, you won’t qualify for the relief on the cost of the car as a whole in one go. However, you still get tax relief on the actual payments you make.

Sometimes, depending on the CO2 emissions (currently over 50g/km) there can be a 15% restriction on the tax deduction for lease payments.

One practical challenge: if your limited company is new, you may find getting direct finance in the company name difficult whether leasing or buying,.

– What about hybrids?

Whilst not as good in terms of tax as 100% electric cars, hybrid cars can often benefit from cheaper benefit rates due to their lower CO2 emission. The actual % rate applied for the benefit depends on the range (in mileage terms) that the battery can provide, along with the CO2 emissions.

– What happens if I buy the car, then sell it the next year (for example)?

You may pay some tax back, depending on what relief you gained when you bought it. If you qualified for tax relief on it at 100% in year one, you pay some tax back if you sell it in year 2, based on how much you receive for the car.

The practical effect is you only get tax relief on the true cost, which is the difference between what you bought and sold it for.

So, what applies as a sole trader?

We’ve written a blog covering motor expenses for the self-employed here. The main thing to note is if you use the Actual Expense (Method 1) option covered in the blog, you could potentially claim the beneficial ‘Capital Allowances’ rates up for to 100% the cost of the car.

I’m still confused about vehicle tax benefits

It is a little complicated and to be honest, somewhat tedious! So, save yourself the headache and ask your accountant. You can also book a consultation with us even if you’re not a client. We offer a paid 1 hour, 1-2-1 consultation so you can ask us all about benefits, tax rates, the lot.