Electric car tax

How much tax can you expect to pay on electric cars, and the differences between leasing and hire purchase 

By Published On: 26 June 2024

If you run your own Limited Company and are considering an electric car, do you know the taxable implications depending on the choices you make? 

In this blog we take a closer look at the tax you can expect to pay on electric vehicles, and the differences between leasing, hire purchase and outright purchase. 

Electric cars 

In an attempt to encourage electric car purchase and help the government reach its net zero target by 2050, the Benefit in Kind (BiK) for electric company cars is 2% for the 2024/25 tax year, then from 2025 onwards the rate will increase by 1% every year until 2028, to a total of 5%. Whilst an annual increase may put some off at first, it’s still a long way away from the maximum of 37% BiK that a petrol or diesel car could attract. So at present, only 2% of your electric car’s list price is taxable. 

What’s the cost? 

Car tax is split between what the employer pays, and what the employee pays. For example, if a company purchased an electric car based on the list price of £31,140, the BiK due would be £622.80 (2%) as the taxable amount for the current tax year 2024/25. The total amount from the £622.80 of which the employee would need to pay, is based on their income tax bracket, so for example as a basic rate tax payer, at 20% they’d have to pay £124.56 per year. Higher and additional rate taxpayers would need to pay 40% or 45% accordingly.  

The employer must also pay National Insurance Contributions (NICs) on the car’s BiK value, which is currently set at 13.8%. So 13.8% of £622.80 is £85.95, which is your Class 1A employers National Insurance, and this is payable by the company. We advise speaking to your accountant if you’re concerned about these values pushing you into different tax rates.  

Corporation tax – lease 

Electric cars mean companies can save on Corporation Tax also. For some low emission cars there’s a 100% first year allowance, meaning you’re able to claim the monthly lease costs through your Limited Company, which would also get Corporation Tax Relief as the emissions of the vehicle is 50G/KM or less.  

The following example is based on a four-year lease with a deposit of £1,000 and monthly instalments of £299. The Corporation Tax Relief you’d receive is as follows: 

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  

For hire purchase you’ll be able to claim Capital Allowances on the purchase of the vehicle as a ‘First Year Allowance 100%’ asset, as the car is brand new and it’s CO2 emissions will be 0G/KM. 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 25% 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, 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. You’d put these costs through your Limited Company and the leasing payments would be explained like so: 

  • Type = payment 
  • Category = leasing payment 

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

P11d 

Your company will need to file a P11d each year which will incur a cost. With Aardvark Accounting it’s only £70+VAT per year or £5.50+VAT per month, so please do let your Client Director know if you need this service adding to your annual service with us.  

How else your Aardvark 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.

Note: All the information and advice in this blog post was correct at the time of writing.

Share This Article, Choose Your Platform!

Just starting out?

  • Complete business set-up at no extra charge

  • Bespoke tax and IR35 advice

  • FreeAgent accounting software

Switching Accountant?

  • Switching is quick and easy

  • Quick and responsive personal service
  • Pro-active tax review and advice on improvements