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The tax benefits of electric vehicles

Updated: Mar 6

The Government is pushing back the ban on new petrol and diesel cars by five years. This delay is slowing down the switch to electric vehicles. Now, all new cars must be zero-emission by 2035.


Electric car

Besides helping the environment, electric cars come with significant tax benefits, making them appealing to many.


This article explores the tax advantages and incentives for electric or low-emission vehicles in the UK.


P11D/Class 1A National Insurance

When a company gives an employee a car they can also use for personal reasons, the employee must pay tax and National Insurance Contributions (NIC) on this benefit.


The amount of tax depends on the car's CO2 emissions. Electric cars, emitting zero CO2, fall into the lowest tax band, reducing the tax employees owe. This makes electric vehicles a great choice for both businesses and employees. By contrast, petrol or diesel cars can have tax rates as high as 37%.


Percentage used in tax benefits of electric cars (registered before 6th April 2020) 

Vehicle CO2

2023/24

2024/25

2025/26

0g/km

2%

2%

3%

1-50g/km (electric range >130 miles)

2%

2%

3%

1-50g/km (electric range 70-129 miles)

5%

5%

6%

1-50g/km (electric range 40-69 miles)

8%

8%

9%

1-50g/km (electric range 30-39 miles)

12%

12%

13%

1-50g/km (electric range <30 miles)

14%

14%

15%

The percentage for fully electric cars (0g/km) will increase to 4% in 2026/27 and 5% in 2027/28.


Electric Vans

In April 2021, HMRC changed the tax rules so that having a zero-emission van for personal use doesn't lead to any taxable benefit.


If you only use the van for work and commuting, you won't face any tax.


Businesses might also receive grants to help lower the cost of buying a van, making it more affordable.


Electric bikes

When it comes to taxing bikes, it's crucial to distinguish between electric bicycles and motorcycles because they're treated very differently.

For an electric bicycle (also called electrically assisted pedal cycles), it must:

  • Have pedal assistance

  • Not exceed a motor-powered speed of 15.5mph

  • Have an electric motor with a maximum power output of 250 watts

Anything beyond these criteria would be considered a motorbike.


You can provide an e-bike through the Cycle To Work Scheme without facing any tax consequences, as long as you adhere to the scheme's regulations.


Motorcycles are taxed based on general asset usage rules, typically around 20% of the asset's market value.


Businesses purchasing an electric motorcycle with a range of at least 31 miles may qualify for a plug-in grant, providing them with potential benefits.


Capital allowances

Businesses that buy electric vehicles with zero emissions get special tax benefits.


From April 1st, 2021, businesses purchasing new cars with 0g/km CO2 emissions can claim a 100% First Year Allowance (FYA). However, used electric cars aren't eligible for FYA; instead, regular capital allowances apply.


From April 1st, 2023, purchasing a van grants incorporated businesses a 100% FYA and non-incorporated businesses a 100% Annual Investment Allowance.


This is summarised n the table below:

Type of car

CO2 Emissions

Capital Allowance

New

0g/km/Electric

100% FYA

Used

0g/km/Electric

18% FYA

New & Used

between 1g/km and 50g/km

18% WDA

New & Used

more than 50g/km

6% WDA

Electric charge points and charging costs

The UK Government is supporting the expansion of electric vehicles by providing tax perks like grants and savings.


Capital Allowances

The business can get a 100% First Year Allowance for installing new and unused electric vehicle charge points. This means they can subtract the entire cost from their taxable profits in the year they buy them.


Benefits in Kind

Benefits in kind are extra perks employees and directors get besides their salary. Sometimes, these perks are taxable and are called benefits in kind.


For instance, company cars used personally are a type of benefit in kind.


With non-electric cars, there's a tax charge if fuel is provided for private use in a company car. But providing electricity to charge a fully electric car isn't considered fuel, so there's no fuel charge. However, this exemption doesn't apply to hybrid cars.


When it comes to charging the car - when is there a taxable benefit?

Employees can charge their own electric cars at work without facing any taxable benefit. Employers need to ensure charging facilities are available at or near the workplace for all employees.


Personal electric vehicle

When an employee charges their personal electric vehicle at home, how it's taxed depends on who provides the electricity:

  • If the employer provides the electricity:

  • If the car is used solely for personal, mixed, or business purposes, the cost of electricity is a taxable benefit.

  • If the employer reimburses for the electricity:

  • If the car is used only for private use, the reimbursement counts as taxable earnings.

  • If the car is used for both business and personal, and the employer only reimburses for business miles, there's no benefit.

  • If the car is used for both business and personal, and the employer reimburses at a flat rate, the reimbursement is taxable earnings.


Company electric vehicle

When a company car is charged at home, how it's taxed depends on who provides the electricity:

  • If the employer provides the electricity:

  • There's no extra benefit, regardless of private use of the vehicle.

  • If the employer reimburses for the electricity:

  • If the car is used for both business and personal, the reimbursement is taxable earnings.

  • If the car is used for business only, the reimbursement is exempt from tax.

  • If the employee provides the electricity:

  • If the car is only used for private use, there are no tax implications.

  • If the car has mixed or exclusive business use, there's no additional benefit, and the employee can deduct the cost of business miles traveled.

  • If the car is charged at a charging point and the electricity is provided by the employer through a charge card, there's no additional benefit.


HMRC offers a helpful service to check if charging an electric car is taxable.


Mileage payments

Employers sometimes give Mileage Allowance Payments (MAPs) to employees for using their own vehicles for work trips. If these payments match HMRC's approved rates, they don't need to be reported to HMRC. For cars and vans, the approved rate is 45p per mile for the first 10,000 miles, and 25p per mile after that.


Any payments exceeding these approved rates are taxable and must be reported on a P11D form. But if payments are below the approved rates, there's nothing to report to HMRC. The employee can then claim tax relief on the difference.


Grants

The Government offers grants to help cover the costs of setting up smart charge points for electric vehicles.


Certain small and medium-sized businesses can receive grants to install electric vehicle charging points in their commercial parking areas. These grants, available through the EV Infrastructure Grant for staff and fleets, cover up to 75% of installation costs, with a maximum grant of £15,000.


Leased cars

Leases can vary in type, affecting the tax relief on lease payments.


If you intend to return the car, it's considered an operating lease, unlike a Personal Contract Purchase (PCP).


For operating leases, if the car emits under 50g/km, you can get tax relief on all lease payments. But if emissions exceed 50g/km, you can only claim 85% for income tax or corporation tax purposes.


Can you reclaim VAT on an electric vehicle?

If you use a car for any personal reasons, you can't recover the input VAT when purchasing it. Reclaiming VAT on a car used solely for business can be challenging to prove to HMRC.


Leased cars face a similar restriction. If they're used for personal purposes, you can only recover 50% of the input VAT on the leasing charge. However, full VAT recovery is possible for ongoing maintenance costs, following the usual partial exemption and business use tests.


Input VAT can be reclaimed on vans and motorbikes, but this is subject to partial exemption and/or non-business use considerations.


Privately owned electric cars

When employees use their personal electric cars for work trips, the company can give them tax-free mileage allowance:

  • 45p per mile for the first 10,000 miles driven in the year,

  • Additional business miles reimbursed at 25p per mile.

Payments exceeding these rates must be reported as a benefit on a P11D. If employees are reimbursed below these rates, they can claim tax relief on the difference.


Have any questions or want to work with us? Contact us on info@kmaccountancy.co.uk or 0141 266 0563.


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