Taxing electric cars

6 September 2023 / Insight posted in Article

The UK tax regime includes measures designed to encourage and support the use of electric (or low-emission) vehicles. Here, we set out the key tax implications of businesses and employees buying and using electric cars.

Capital allowances

Where a business buys a new and unused fully electric vehicle for the purposes of a qualifying activity, it can claim a 100% first year capital allowance. This means the full cost of acquiring the vehicle is deductible against taxable profits in the year of acquisition. A similar regime (known as “full expensing”) has now been introduced for many other assets that qualify for capital allowances purposes. However, this regime does not generally apply to cars, meaning this 100% first year capital allowance can provide a real incentive for buying a fully electric vehicle.

Providing electric cars to employees

Providing a company car usually results in the employee being subject to income tax and the employer being subject to national insurance contributions (NICs) on a percentage of the car’s list price each year under the “benefits in kind” rules.

The relevant percentage can be as high as 37% but for cars with zero CO2 emissions this is currently just 2%. For cars with emissions of between 1 and 50 g/km, the percentage is currently between 2% and 14% depending on the electric range of the car.

Where an employer covers the cost of private mileage in an electric company car, no further benefit will arise. This is the case regardless of whether the employer allows the employee to use a workplace charging point or reimburses the (precise) costs incurred in charging the vehicle elsewhere.

Since 6 April 2017, the “optional remuneration arrangement” rules have ensured that, where an employee gives up salary in exchange for the provision of a benefit, the taxable benefit is the greater of the taxable value under the standard “benefits in kind” rules and the amount of salary foregone. These rules do not apply to company cars with emissions of less than 75 g/km, so salary sacrifice arrangements involving electric cars can be very tax-efficient. Further information can be found here.

Business travel

HMRC publishes advisory fuel rates which can be used where employers reimburse employees for costs they incur in making business journeys in company cars; if the mileage rate paid is no higher than the relevant advisory fuel rate, no income tax or NICs will arise on the reimbursement. (The rates can also be used if employees need to reimburse their employers for private travel in a company car.) The advisory fuel rates for petrol and diesel cars vary depending on engine size, but the advisory fuel rate for all fully electric vehicles is 10p a mile from 1 September 2023.

Where employees use their own vehicles for business journeys, employers can reimburse employees at 45p per mile for the first 10,000 miles incurred each year, and 25p per mile thereafter, without any income tax or NICs arising. These rates apply equally to petrol, diesel, hybrid and fully electric cars.

Charging electric cars

No benefit in kind charge arises where employees are allowed to charge their electric car at their employer’s premises. This is the case regardless of whether the car is a company car or owned by the employee personally.

Where an employer pays or reimburses the cost of charging electric cars off-site, it depends on whether the car is a company car. If it is a company car, this will not give rise to any tax implications. If it is not, the cost to the employer of providing mileage for private journeys will give rise to tax implications.

Lastly, no taxable benefit arises where an employer pays for the installation of a charging point at the employee’s home, where the employee has a company car available for private use.

Future duty payable on electric cars

These tax rules are relatively insignificant in terms of government finances. The far more significant aspects of the UK’s vehicle tax regime are fuel duty and vehicle excise duty (VED) which, together, are understood to raise approximately £35 billion a year.

Fully electrical vehicles are currently exempt from VED and fuel duty – because they do not use petrol or diesel. Electric vehicles are increasing in popularity and there are plans to ban the sale of new petrol and diesel cars in the coming years. Clearly, the amounts the government receives from taxing petrol and diesel cars is going to fall.

VED is now due to be introduced for zero-emission vehicles on 1 April 2025. However, ultimately more is needed in the long term to recoup the £35 billion. One suggestion is a comprehensive national road pricing system.

Over time, the tax benefits of electric cars for businesses and individuals will fall. For now, they provide incentives worth considering.

If you have any questions on taxing vehicles, please do not hesitate to contact us and we will guide you through your options.

Get in touch

How did you hear about us?