Guest Blog
Written by Phil Murphy; Trainee Chartered Accountant & Claire Stewart (Partner) at Cartmill Stewart & Co. You can contact them directly on 028 9252 8710 or email philip@cartmillstewart.co.uk / claire@cartmillstewart.co.uk for more information or advice.
As tax advisors and accountants, we are always doing our best to keep our clients informed about changes in tax legislation. Top of the list is how we keep our client’s tax to a minimum… legally, of course!
When it comes to company vehicles, this has been an ever-changing landscape for many years. If you keep up to date with the news at all, you will know that the government is strongly encouraging the move towards electric vehicles. This is all down to a massive drive towards global climate change and improving things for future generations. Now for those of you who are petrolheads, would the possibility of saving thousands of pounds in tax help the switch to electric a little easier?
In order to make sure there is a tax saving, we need to look at the circumstances individually. We would like to note that these are just some key points to think about if you are considering the change to EV (what the cool kids call electric cars)
Benefit in Kind for employees/directors
Let’s run through a couple of examples to paint the picture and see how this benefits you as an employee of the company.
Petrol vehicles
If you were to buy a BMW 4 series Gran Coupe for £60k list price, then the Benefit in Kind (BiK) due on your tax return would be based on the Co2 emissions of the car.
The emissions on the BMW 4 series would be 178 g/km which equates to a BiK rate of the maximum 37% of the price of the car (diesel cars even incur an extra 4% on top of the petrol rates). If you currently pay tax at the basic rate of 20%, you will have a personal tax liability of £4,440; £8,880 if you are in the higher tax band!
These figures are substantial… and this is before we even consider the fuel BiK for personal use (if your company pays for your fuel). For the private fuel element, we use the same Co2 emission rate of 37% against a fixed amount £24,600 (21/22 figure). This adds £1,820 to the basic rate taxpayer and £3,640 to the higher rate taxpayer. The fuel portion can be reduced if you make payments back to the business for your private use of the vehicle.
But as a 40% tax payer, this can mean you are paying c. £12,500 in tax for a company car and fuel. Crazy!
Electric Vehicles
The totals for petrol and diesel cars can start to mount up which is where the tax savings for electric vehicle start to become more appealing.
Using the electric version of the example above. Lets look at the BMW i4 eDrive with a list price of approximately £60k. As this vehicle is fully electric the Co2 emission rate used to calculate the BiK on this vehicle is 1% for the 21/22 tax year rising to 2% for the 2022-23 tax year.
This reduces the tax liability from a petrol car of £4,440 down to £120 for simply switching to the electric model. And since electric charging is not classified as fuel in the regulations, the fuel BiK is not added for personal use. Win win!
So not only are you saving from paying big sums on your tax bill, you are also saving money on the rising prices of fuel.
What about the company – how does it benefit?
The company can take advantage of the deposit and monthly payments through the business to reduce profits by the net amount (excluding VAT). Therefore, reducing the corporation tax by 19% of the total net figure for the year. (in the 2021/22 tax year).
VAT for the purchase or lease can be reclaimable off your VAT return too. 100% of the VAT can be reclaimed if the car is used 100% for business use (must be demonstrated) and 50% if private usage.
First year capital allowance can also be claimable for qualifying new electric vehicles. Hence, your business can claim 100% tax relief for the cost of the vehicle. This deduction was recently extended until 31 March 2025.
Businesses can benefit from the current super deduction for the cost of installing and purchasing a fixed electric charger, which gives 130% first year allowance on qualifying electric charging points used for business use. I.e. better than 100% tax relief!
Other advantages of electric vehicles are: they are exempt from road tax, cleaner for the environment than petrol/diesel cars with lower running costs, a lot quieter reducing noise pollution.
Things to consider…
- Charging point locations are increasing rapidly although are not everywhere yet. This means journeys will have to planned, if running low on charge
- Charging points at business premises or at home are easy to install
- The range of electric vehicles are increasing every year and as technology advances, yet currently (in most cases) the range of a full tank of petrol or diesel will get you further than electric
- Some new models of cars are on back order for multiple months due to supply chain issues and shortage of chips for the cars, so may have to wait a little longer for certain models
Are Hybrids an option?
They are calculated a little differently. If the Co2 emissions are less than 50g/km the electric range is taken into consideration. If the electric range is above 130 miles, they have the same BiK of electric vehicles of 1% (2021-22 figure) increasing to 2% in 2022-23 tax year. This percentage is increased gradually up to the lowest range of ‘less than 30 miles’ with a BIK of 13%.
With Hybrids you will still have to pay road tax, albeit reduced. And you will lose some of the environmental/green benefits of driving an electric.
Salary Sacrifice
Interestingly, there is a salary sacrifice scheme which enables employees to ‘sacrifice’ some of their gross salary to receive the benefit of driving a fully electric vehicle. As the salary is taken before PAYE tax and National Insurance contributions are applied, the employee effectively saves costs on the acquisition of the vehicle.
The employee pays the monthly fee out of their salary before tax (with no up-front costs for the vehicle) and the only extra they pay is the BIK tax. Which as we saw above, if they chose electric, might only be a couple of hundred pounds a year.
How does this benefit the company?
The scheme provides an opportunity to provide employees a new electric car at a reduced cost (than in the retail market) in a tax efficient manner. The employee receives the car, tax, insurance, maintenance and more which can help improve employee motivation, leading to improved productivity and retention.
The company also benefits with reduced National Insurance contributions payments from the scheme.
There are many other points and areas to consider, so we would suggest you seeking the advice of your accountant / tax advisor, before making the decision. The advice should be tailored to your own individual circumstances.