Electric car tax – how much can you expect to pay and the differences between leasing and hire purchase

Are you running your own Limited Company and considering switching to an electric car? Before taking the leap it’s worth understanding the taxable implications that come with an electric car, and how this can be affected by the final decision you make.

In this blog we explore the tax due on electric cars when buying outright, leasing and hire purchase.

Electric Cars

Currently the Benefit in Kind (BiK) for electric company cars is 2% for the 2024/25 tax year, which will increase by 1% every new tax year until 2028, to a total of 5%. If the annual increase may make you think twice about going electric, it’s worth remembering that this small % increase is still a large amount from the maximum 37% BiK that comes with the highest emission petrol or diesel cars. So at present, only 2% of an electric car’s list price is taxable.

How much will it cost?

Payment for the car’s tax is split between what the employer pays, and what the employee pays. For example, if a Limited Company purchased an electric car based on a list price of £31,140, the BiK due would be £662.80 (2% of the total list price) as the taxable amount for the current tax year 2024/25. The employee will need to pay an amount based on their income tax bracket from the £622.80. So for example a basic rate tax payer at 20%, you’d need to pay £124.56 per year. If you’re a higher or additional rate taxpayer you’ll need to pay 40% or 45% accordingly.

The employer must also pay National Insurance Contributions (NICs) on the car’s total BiK value, which is currently 13.8%. So 13.8% of £622.80 is £85.95, which is your Class 1A employer’s National Insurance, which is payable by the company. Your accountant will be able to advise you on the values you’re due to pay, and any concerns you may have about these values pushing you into different tax rates. Electric cars come with a bonus for the companies too, as they’re able to save on Corporation Tax.

Corporation Tax – lease

If the emissions are 50G/KM or less, 100% of the lease costs are allowable for Corporation Tax Relief. You’re also able to reclaim 50% of the VAT back from HMRC.

The following example is based on a four-year lease, with a £1,000 deposit and monthly instalments of £299 excluding VAT, after 50% is reclaimed. The following Corporation Tax is what you’d receive:

Year 1

£1,000 deposit plus 11 monthly payments of £299 = £4,289

Allowable Corporation Tax Relief = £4,289 x 100% = £4,289

Therefore, the Corporation Tax Relief received is £4,289 x 19% = £814.91 for the minimum relief and up to £1,072.25 based on 25% for the maximum relief depending on the company’s profit.

Year 2

12 monthly payments of £299 = £3,588

Allowable Corporation Tax relief = £3,588 x 100% = £3,588

So the Corporation Tax Relief received = £3,588 x 19% = £681.72 for the minimum relief, and up to £897 based on 25% for the maximum relief, depending on the company profits.

Year 3 and 4 – is the same as year 2.

By leasing a car it’ll be in your Limited Company’s name rather than your own, and therefore you’re able to put through any incurred expenses, such as servicing, repairs, and insurance through your company.

Corporation Tax – hire purchase

As the car is brand new or unused and it’s CO2 emissions are 0G/KM, you’re able to claim Capital Allowances on the purchase of the vehicle as a ‘First Year Allowance 100% asset’. So for example if the car cost £31,140 new, the following would apply:

Year 1 – 1st year of purchase

£31,140 will be included as an asset for the company and shown on the Limited Company’s balance sheet, then £31,140 x 19% = £5,916.60 of Corporation Tax Relief will be available in the first year of purchase. The relief again could increase up to 27% depending on the company’s total profits in the year.

VAT

As per HMRC’s rules when leasing a vehicle, you’re only able to reclaim half of the VAT element, as HMRC will deem that you’re using the vehicle for both personal and business purposes. Be aware that the VAT reclaim will only apply if you’re on the standard VAT scheme, and you’ll be unable to reclaim the VAT if you’re on the Flat Rate VAT scheme.

You’re able to put these costs through your Limited Company, so long as the lease and vehicle are in the company’s name.

If you’re purchasing the car via a hire purchase car agreement (where there is personal usage) there is no reclaimable VAT as per HMRC’s guidelines.

P11d

If you go ahead with the purchase, your company will need to file a P11d, due to be filed by 6^th July each year. We will be able to prepare and submit this for your as part of your package here at SG Accounting.

How else your SG Accounting Client Director can help

If you’re considering purchasing an electric car but need a little help in understanding exactly how much the various options could cost you, get in touch with your Client Director. They’ll be able to provide you with a tailored illustration of costs, to help you make up your mind. We’re here to help and only a phone call or email away, so get in touch today to ask us about electric car tax, or anything else.