Following huge rises in petrol and diesel prices, you may be wondering if now is the time to make the switch to electric company cars, as you understand there are tax benefits in doing so. But what tax breaks are available? Charley Fojcik discusses.
Where an employee has a company car which is available for their private use, a tax charge arises under the benefits-in-kind legislation. The amount charged to tax is a percentage of the car’s list price, as adjusted for optional accessories and capital contributions. The percentage depends on the car’s CO2 emissions, with a supplement applying to diesel cars that do not meet an emissions test. The charge is adjusted to reflect periods for which the car is not available for the employee’s private use, and contributions made by the employee for private use. Employers must pay Class 1A NI on the taxable value of the benefit.
Electric company vehicles
For 2022/23 to 2024/25 inclusive, the appropriate percentage for an electric vehicle (EV) is 2%. This means that EVs can be a tax-efficient benefit.
For example, if an employee has an EV with a list price of £30,000 available for private use throughout the tax year, the taxable amount is only £600 (£30,000 @ 2%).
Consequently, a higher rate taxpayer will only pay tax of £240 on the benefit of a £30,000 EV – and for a basic rate taxpayer, the tax bill is only £120. As the Class 1A charge is based on the taxable amount, going electric benefits the employer too; at 15.05% the Class 1A liability in respect of the provision of a £30,000 EV with a taxable benefit of £600 is only £90.30.
Petrol and diesel cars
In contrast, there’s a maximum charge of 37% of the list price which for 2022/23 to 2024/25 applies to petrol cars with CO2 emissions in excess of 160g/km (and diesel cars not meeting the RDE2 emissions standard with CO2 emission in excess of 145g/km). At the maximum charge, the taxable amount for a £30,000 company car would be £11,100 (£30,000 @ 37%), on which a higher rate taxpayer would pay tax of £4,440, a basic rate taxpayer would pay tax of £2,220 and the employer would pay Class 1A NI of £1,670.55.
As demonstrated, moving to EVs can generate significant tax savings for the employee and Class 1A NI savings for the employer.
Low emission cars
Clients may be concerned that the infrastructure to support fully electric company cars is not quite there yet, particularly if an employee’s mileage is high. However, for clients not yet ready to embrace a fully electric car policy, low emission vehicles can be a tax-efficient stepping stone.
The appropriate percentage for cars with emissions in the 1-50g/km range also depends on the electric-only range of the car, the greater the range, the lower the charge.
Low emission cars can be tax efficient, particularly if the car has a good electric range. The charge for a hybrid with an electric range of at least 130 miles is the same as for an EV.
No fuel benefit
Where fuel is provided for private motoring in a company car, the fuel benefit charge can be significant. The taxable amount is the appropriate percentage used in the car benefit calculation multiplied by the fuel multiplier for the year. For 2022/23 this is £25,300. The upshot of this is that where the list price of the car is less than £25,300, the employee will pay more tax on the benefit of free fuel for private motoring than on the provision of the car.
However, HMRC does not regard the provision of electricity for an EV as fuel. This means you as the employer can meet the cost of electricity for private journeys in an electric company car without any associated tax or Class 1A NI liability.
In the current climate, tax-free “fuel” for private journeys is a valuable benefit.
If, on the other hand, the employee pays for the electricity for a company car, despite HMRC not regarding electricity as a fuel, the employer can pay a tax-free allowance for business mileage of 5p per mile.
Where an employee uses their own EV for work, the employer can make tax-free mileage payments up to the approved amount.
For cars (including electric cars) this is set at 45p per mile for the first 10,000 business miles in the tax year and 25p per mile thereafter.
Electric charging points
To encourage employees to adopt EVs, an employer may choose to install an electric charging point at the workplace. Where the employer meets the cost of business mileage, there are no tax implications for the employee. As noted above, an employer can also provide or meet the cost of electricity for private motoring in an employee’s company car without triggering a fuel benefit charge.
Employees can use a workplace charger to charge their own electric or hybrid cars, or one in which they are a passenger, without a taxable benefit arising. This allows the employer to meet the electricity cost of an employee’s private motoring in their own car tax free – another valuable benefit.
The exemption only applies to workplace charging facilities. It does not apply if the employer pays for or reimburses the cost of off-site charging. Further, the exemption is conditional on the charging facilities being available to all employees who wish to use them (or all those at a particular site where the employer has more than one site).
The capital allowances system also rewards environmentally friendly choices. Cars (unlike vans) do not qualify for the annual investment allowance (or for the super-deduction or 50% first-year allowance available to companies for a limited period). However, a 100% first-year allowance is available for new and unused EVs.
Where the first-year allowance is not available (or not claimed), main rate writing down allowances at 18% are available for expenditure on cars with CO2 emissions of 50g/km or less. Where CO2 emissions exceed 50g/km, special rate writing down allowances at the rate of 6% are given instead. Figures apply to expenditure incurred on or after 6 April 2021.
You can also benefit from a 100% first year capital allowance on the cost of workplace charging facilities.
An employee can enjoy unrestricted private motoring in an electric company van tax free. Where the employer meets the cost of the associated electricity, this too is tax free. This makes an electric company van a tax-efficient perk.
Where an employee is provided with an electric company van, there is no need for the restricted private use condition to be met to avoid a van benefit tax charge.
The main benefits for choosing new 100% electric company cars are a significant reduction in the Class 1A charge, and the ability to claim a 100% first year allowance. The tax charge for your employees is also lower. Please note, hybrids still offer savings, as this may be suitable for employees who undertake higher mileage.