Is now the time for an electric car?
With the governments recent announcement that it will bring forward the ban on the sale of new combustion-engined cars from 2040 to 2030 is now a good time to consider switching your vehicle to an electric one?
With petrol and diesel powered vehicles making a significant contribution to CO2 emissions and associated environmental impact of this, the government is encouraging people to make the switch to electric vehicles. One mechanism used for this is how company car are taxed, making them a more attractive proposition for both business owners and employees alike.
How are company cars are taxed?
For the employee
When a car is provided by the company and is accessible for personal use the employee is deemed to have received a taxable “Benefit In Kind”. The value of this is calculated based on the original list price of the vehicle, the type of fuel it uses, and a percentage rate set by HM Treasury based on its CO2 emissions. This gives a Benefit In Kind value that is then added to the individuals income and taxed at the applicable tax rate for their total earnings.
to give an example;
For a petrol car with CO2 emissions of 128 g CO2/km and a list price of £28,000 it will have a benefit in kind rate of 28% which ultimately gives a tax charge of £3,136.00 for the 2020-21 tax year for a higher rate (40%) tax payer.
For the company
Company cars, even with relatively low CO2 emissions, do not qualify for any accelerated allowances on the purchase itself. Instead only 18% of the purchase price can be deducted from taxable profits each year. So for a car with a purchase price of £28,000 only £5040 (18%) can be deducted. This reduces the corporation tax by around £907 for the first year. Following years are calculated at 18% on the unused balance so this amount reduces subsequent years.
For cars with CO2 emissions of over 110g/km the situation is even worse, with only 6% being deducted – a reduction in tax of only £319 for the figures above.
So looking at the above, the taxes for the individual exceed the savings made on corporation tax for petrol and diesel cars.
Taxes for an electric car
By switching to an electric car the benefit in kind rate will be 0% for 2020-21. Increasing to 1% in 2021-22 and 2% in 2022-23. With a car with a £40,000 list price this would give a higher rate (40%) tax charge of only £320 in 2022-23. Significantly cheaper than the petrol or diesel equivalent above.
For the company, electric cars qualify for first year allowances. This means 100% of the purchase price can be offset against corporation tax in the year of purchase. E.g. a £40,000 electric car will save £7,200 in corporation tax in the year it is purchased. Compare that to the 18% or 6% on petrol and diesel cars above makes an electric car much more favourable from a tax perspective. It is also worth noting that assets purchased on a Hire Purchase agreement can also have 100% of the purchase price offset so it does not have to have the same impact to your cash flow as purchasing the car outright. (leased vehicles however are treated differently).
Obviously switching to an electric car comes with wider considerations, e.g. range, purchase price, recharging time, electric costs etc but hopefully the tax advantages at least are clear.
Read about some of the other ways you can save your business tax.