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

The ban on petrol and diesel cars will come into force in 2030, and with more and more electric cars on the roads, they’re becoming an ever increasingly popular mode of transportation. So if you’re looking to purchase a car through your Limited Company what are your options, and are there any attractive tax benefits to buying green?

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

Company cars

Traditionally a company car meant that the ever increasing tax and perceived hassle that came with it had meant that it wasn’t really worth it in the long run, as you wouldn’t make that much of a saving. But with the introduction of electric cars and HMRC’s recent changes in tax, it may once again be worth purchasing a car through your Limited Company.

Electric cars popularity

The popularity of electric cars is set to increase at a compound rate of 29% between now and 2030, and they’re set to play a huge role in the government’s push to reduce the UK’s carbon emissions, and reach their targets. To encourage people to buy green, the government has reduced the Benefit in Kind (BiK) tax on electric cars to zero. Whilst this rate is set to rise soon, it’ll still offer an incredible deal.

How will electric cars be taxed?

At present car tax is split between what your Limited Company pays, and what you as the employee of your Limited Company pays. The total amount of tax due is based on its actual value, the BiK tax and the car’s emissions.

Your tax band will also have an effect on how much you’ll have to pay, and 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 Aardvark accountant will be able to calculate this for you.

Your company will also have 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.

Until April 2020 the BiK tax on electric cars was 16%, so for example if your electric car had a list price of £30,000 your BiK would be £4,800 (16% of £30,000). You’d then have to personally pay income tax on this, depending on your tax band (20% or 40%). Your company would also have to pay National Insurance on this via your P11D form (13.8% of the BiK).

In April 2021 it was announced that the BiK for electric cars will drop from 16% to 0%. It’s then set to rise to 1% in the tax year 2021/22, and then to 2% in 2022/23.

What about the tax on vans?

If you use your van for both personal and professional use, you’ll have to pay a ‘van benefit charge’ of £3,500. As with cars, you’d also need to personally pay 20% (or 40% if you’re in the higher tax group), via your Self-Assessment Tax Return, and 13.8% via your 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 the best option for you?

The decision is purely yours, but if you’re not quite ready to give up the security of also having a fuel backup reserve on-board, then a hybrid may be the best option for you. Whilst more and more plug ins and charging points are popping up every day, there’s still the chance you could get caught short, especially if you take long journeys, and so also having the option to fill up on fuel could be best for you.

Are there any other savings?

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

What does the future hold for electric cars?

By the time the ban comes into force, there’s no doubt that the issues electric cars are currently facing will be pretty much ironed out, and they’ll be the norm. They’re better for the environment, will have the latest technology on board meaning safer and more efficient cars, and they’ll also be cheaper from a tax point of view, as this blog has shown.

If you’re considering purchasing a company car in the next few years, be sure to discuss your plans with your Aardvark accountant. They’ll be able to advise you on what option is best for you, based on your personal circumstances, and how much in tax you can expect to pay. Get in touch today with your accountant to discuss your future plans.