Electric cars and benefit in kind – what you need to know

By 2026, electric vehicles (EVs) are expected to account for a fifth of all new car sales. So what are the tax benefits associated with owning an electric car and how much could you potentially save by switching to an EV company car?

Statistics show that electric car sales increased by 40% in 2022 with more than one in 10 new vehicles being electric. However, while electric cars sound great in principle, you must weigh up the price and vehicle range (and therefore the practicality), resale value and whether the cars are actually available? Some of my clients have waited more than a year after placing an order for cars to be delivered.

However, I have seen more and more electric cars being purchased, which is a clear sign that more are becoming available on the market. Although electric models can have their drawbacks, it’s still worth looking at the tax advantages of electric car ownership, which may even up the playing field.

The company car

One of the most appealing options when it comes to electric vehicles is running one as a company car.

As with a petrol or diesel car, there is still a benefit in kind implication, but the rates are much lower than their fossil-fuel counterparts.

If an employee can get a fully electric car, they will still pay income tax on the benefit in kind, but this is calculated at the very low rate of only 2% of list price for the 2023/24 and 2024/25 tax year although this will rise by 1% per year reaching 5% in 2027/28. Employers Class 1A NIC will be due on this amount so a PAYE scheme will be needed. No car fuel benefit applies, as tax law does not currently treat electricity as a fuel.

Additionally, if the electric car is new and unused, the company can claim tax relief on 100% of the cost of the car (18% if purchased second hand). All maintenance costs, including insurance, can also be offset against profits.

The hybrid option

If you can’t quite take the plunge to full electric, it could still be tax efficient to look at a hybrid vehicle where the benefit in kind is calculated using Co2 emissions, combined with the electric range.

Take a look at the car, van and fuel benefits here.

However, remember that for capital allowances purposes, the 100% first year allowances wouldn’t be available and would only receive an 18% writing down allowance if the Co2 emissions are 50g/km and below.

Charging facilities

One of the practicalities to consider when owning an electric vehicle is having the infrastructure available to charge it.

If a company can provide workplace charging facilities, then no benefit in kind will arise provided these facilities are at or near the workplace, are available to all employees and are for the battery of a vehicle in which the employee is either the driver or passenger.

An employer can also pay for a vehicle charging point at the employee’s home without a taxable benefit arising. Similarly, a charge card can be provided, without benefit, to allow access to commercial charging points. Alternatively, an advisory fuel rate of 4p per business mile travelled is available.

There is also relief available for self-employed business owners against their profits, with a restriction on any private use of the vehicle.

Comparisons

Let’s make sense of the benefit-in-kind savings available by looking at three different options from Mercedes-Benz.

First up is the fully electric Mercedes-Benz EQA250, compared to the hybrid Mercedes-Benz C300e with an electric range of 68 miles, and a Mercedes-Benz C300 with Co2 emissions of 161g/km. All cars had models with a list price in the region of £50-£60k at the time of writing so we have used a list price of £55k for illustrative purposes.

As the table above shows, an income tax saving of £7,700 could be achieved from operating a fully electric vehicle compared to a car with ‘high’ Co2 emissions. On top, the EQA 250 would also allow the company to claim 100% of the cost upfront against taxable profits, while the C300e would be written down at 18% per annum, and the C300 at 6% per annum based on the Co2 emissions.

Is that the sort of saving which would encourage the swap over? I’ve certainly seen a movement to electric vehicles in my experience, but not at a rate that would make me think the 2030 target is still achievable.

Salary sacrifice schemes

A car salary sacrifice scheme is an agreement between the employer and employee to reduce an employee’s salary in return for the use of an electric car.

Salary sacrifice schemes for electric cars can be tax-efficient due to the savings in income tax and national insurance contributions and the low benefit in kind rates mentioned above. Each month a portion of your salary will be automatically deducted, prior to tax, and this will cover the monthly repayment on the car.

Servicing and insurance will typically be included as part of the scheme, leaving the individual to just pay for electricity. Schemes tend to last from two to four years, and the cars can be for private or business use.

For employers looking to recruit and retain staff, showing ‘green credentials’ by offering an electric car scheme, may also help attract and keep the right talent.

So, while there are clearly many potential benefits to owning an electric company vehicle including a potential tax saving, the practicalities also need to be considered.

If you have any queries, please don’t hesitate to get in touch with me on kieron.BT@bhp.co.uk or your usual BHP contact.