How tax efficient are electric company cars?

Electric company cars are most certainly more tax efficient than petrol/diesel engine models, and here is a little more information you should know if you are thinking of investing in one.

What is the tax system for a company car? 

Cars (be they electric, hybrid or petrol/diesel) can be provided to employees, whether that’s because driving is an essential part of their role or as part of the renumeration package, but will be regarded as a ‘benefit in kind’. Cars may also be provided by the company to the director of an owner/managed business, but will still be a benefit in kind. Even though travelling for work is often part of an employees’ role, they are a perk or fringe benefit that are not included in the employees’ salary in HMRC terms. Another common benefit in kind is private medical insurance.   

However, HMRC still wants to claim a tax payment on a benefit in kind. There is a monetary value of that asset, and tax on this value is deducted via payroll. 

For example, you might have an annual salary of £30,000, a company car benefit valued at £5,000, and so in total you pay basic rate tax on £35,000 (minus, of course, your personal allowance). 

What tax is paid on a car as a benefit in kind? 

To work out what tax you will pay, you need to know its market value, the emissions, and the rate of tax (which is determined by the emissions). The final step is then your marginal rate of tax to be applied. 

Take the cost of the vehicle when it’s new (i.e. not what you pay but the agreed list price), then look at HMRC’s emissions table for the emissions of the vehicle and this will give you the benefit in kind. Once you have the benefit in kind figure, you can work out what tax you will pay on this. 

There is a quirk for hybrid vehicles, in that their benefit in kind is assessed on the mileage range at zero emissions, i.e. when purely on battery power. 

Of course, you need to assess if adding the benefit in kind to your salary takes you into the higher rate tax bracket. 

Higher emission cars are deemed a higher benefit in kind, and therefore incur a higher tax rate. This is intentional on HMRC’s part, as it is trying to push car owners towards low or zero emission cars. 

A car with low or zero emissions incurs a far lower tax liability, because the benefit in kind and the tax rate is much lower. The current tax rate for electric cars is 2 per cent. This is going up to 3 per cent for 2025/26, and will continue to rise by 1 per cent each year until 2028. 

What about the cost of fuel? 

If the fuel for your company car is paid for by the company, this is also a benefit in kind and incurs tax. 

However, if you have an electric vehicle, and your workplace has a charging point, you can charge it here and this is not considered a benefit in kind. The company pays for the electricity, but this is an expense which can be offset against Corporation Tax. 

How does a company car impact company tax? 

Providing a benefit in kind doesn’t only have personal tax implications. The company providing the benefit in kind will have to pay the relevant Class 1a National Insurance. The company will need to complete a form P11D to declare the benefit(s) in kind to HMRC. 

For an owner/managed business, that means the director will have to take into consideration his or her personal tax as well as the National Insurance liability for the car. 

Is it better to have a company car or claim expenses? 

If you have an electric company car, or a hybrid car with emissions lower than 50 g/km, then it is more tax efficient than the alternative of claiming a mileage rate on expenses, for business use. 

Are company cars the same as company vans? 

No, is the short answer. Vans are classed as plant and machinery, and don’t fall under the tax rules for cars. Indeed, vans have a lower tax break.  

For more help and advice on tax planning and tax efficient benefits for company cars or electric vehicles for your owner managed business, get in touch with Optimum’s Accounts Director, Michael Blaken. Email [email protected]. 

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