Electric cars – how much tax can you expect to pay?

The recently announced tax band changes have meant that purchasing an electric car is a more realistic possibility than ever before. Along with the planned ban on petrol and diesel cars from 2030 onwards, you may be considering upgrading your current car. So what are your options when purchasing an electric car, and are there any attractive tax benefits?

In this blog we explore just that, to help you understand how much tax you can expect to pay.

Company cars

Purchasing a company car through your Limited Company was once an enviable perk available only to those who ran their own companies, but over time the increase in tax and perceived hassle that comes with a company car seems to have put many off. But now with the introduction of electric cars and recent HMRC changes, if you’re looking to upgrade your luck is in.

Electric cars popularity

With a predicted growth in popularity at a compound rate of 29% between now and 2030, electric cars are set to play a major role in the government’s push to reduce the UK’s carbon emissions. To ensure their targets are met, the Benefits in Kind (BiK) tax for electric company cars in 2020 was reduced to zero. The BiK rate is going to rise soon, but even with this rise they will still offer a fantastic deal.

How will electric cars be taxed?

Currently company car tax is spilt between what your Limited Company pays, and what you as an employee of your Limited Company pays. The amount of tax will be dependent on its actual value, the BiK tax and the car’s emissions.

Depending on what tax band you’re currently in, as an employee you’ll have to pay income tax on this value. For example:

Basic rate tax – you’ll pay 20%

Higher rate tax band – you’ll pay 40%

In order to calculate your employee tax you’ll need to work out the following: (P11D value) x (BiK band) x (tax bracket). Your Client Director will be able to calculate this for you.

Your Limited Company will also need to pay National Insurance Contributions (NICs) on your company car. BiK tax comes in various bands, and the higher the Co2 emissions, the higher the band you’ll fall into. You can check your car’s Co2 emissions and your tax band by visiting the gov.uk website.

Up until April 2020, electric cars’ BiK tax was 16%, so for example if the list price of your electric car was £30,000 you’d have a benefit in kind of £4,800 (16% of £30,000). You would then pay income tax personally on this, depending on which tax band you’d fall into (20% or 40%). Your company would also pay National insurance on this via form P11D (13.8% of the benefit in kind).

April 2021 brought good news for electric car owners, as the BiK dropped from 16% to 0%. It will, however rise to 1% in 2021/22, and then to 2% in 2022/23. Beyond that there hasn’t been any word on how much the government is planning to increase the tax by in the upcoming years, but they have committed to release any planned increases to BiKs at least two years in advance, to allow people to plan ahead accordingly, and to provide certainty.

What about the tax on vans?

If you purchase a van for personal and professional use, you’ll be liable to pay a ‘van benefit charge’ which is currently £3,500. Like with cars, you’d need to personally pay 20% (or 40% if in the higher rate) of the BIK (£3,500) via your Self-Assessment Tax return, and 13.8% via your Limited Company’s P11D.

Are things different for plug-ins to other hybrids?

A hybrid’s BiK will be dependent on the distance they can travel whilst remaining in their low electric mode, as well as their Co2 emissions. For example:

If your petrol hybrid can travel between 30 and 39 miles alone – you’ll pay a BiK at 11%

If your petrol hybrid can travel between 40 and 69 miles alone – you’ll pay a BiK at 7%

Whilst the BIK rates are higher than pure electric models, it’s still significantly lower than the BiK rates (up to 37%) you’d pay for a purely petrol or diesel car.

Which is best?

If you’re considering a vehicle with electric capabilities but aren’t quite ready to give up the freedom and peace of mind that a fuel driven car provides, then a hybrid might be best for you. Whilst the government is keen to get more electric plugs and points across the country, there’s still the very real possibility that you could be caught short, and therefore having the backup of fuel on board could be a deal breaker. There’s no doubt that by 2030 when the ban comes into force that charging points and batteries with a longer life will be in abundance, but until that time it might best to air on the side of caution.

Are there any other savings?

By having a low emissions car you could be eligible for some Corporation Tax savings. For some low emission cars, there’s 100% first year allowance, which ultimately means you can put the cost of your car’s purchase towards reducing the profits from your Limited Company and ultimately save on Corporation Tax. If you decide to lease rather than purchase the car, you can also use the lease payments to offset your company’s profits, and also therefore reduce Corporation Tax liability.

What does the future hold for electric cars?

There’s no denying that there’s a few logistical issues for electrical cars to get around before they’re as convenient as their fuel guzzling counterparts. That being said they are becoming increasingly popular, and as this blog has shown, cheaper from a tax point of view.

We’re still a good 8/9 years away from when the ban will come into play, so there’s plenty of time for the technology to develop, and so you may not be considering taking the leap just yet. But if you’re thinking about purchasing a new car, either now or maybe in the next year or so, we suggest speaking to an expert accountant who will be able to advise you further on the amount of tax you can expect to pay, based on your personal circumstances. Get in touch today to see how we can help.