Electric Cars are steadily becoming a popular company car choice for UK businesses, it’s no surprise given the favourable tax incentives and environmental benefits.
In this comprehensive guide to electric company cars, we delve into various aspects of adopting electric company cars in the UK. We review the tax benefits for both leasing and buying an electric company car, the operational costs, and the charging options available.
We explore the convenience of EV leasing options and salary sacrifice schemes, in order to equip businesses with a solid overview of their electric options!
What does an EV lease agreement mean?
A business EV lease agreement is a contract that allows a company to use an EV for a set period of time in exchange for regular payments. The agreement is made with a leasing company or dealership that owns the vehicle.
This type of agreement provides businesses with a way to use the latest EV models without the financial commitment of buying them outright, which can be particularly beneficial given the high upfront cost of electric vehicles.
The terms of the lease, including the duration and the mileage limit, are agreed upon upfront. Payments are usually made monthly and are determined based on the value of the vehicle, the length of the lease, the agreed-upon mileage, and the estimated residual value of the vehicle at the end of the lease term.
Once the lease term ends, the business typically has the option to return the vehicle, extend the lease, or sometimes purchase the vehicle for its residual value.
There are substantial tax benefits available for businesses looking to lease electric vehicles, let’s look at these tax benefits in detail.
What are the company car tax rules on electric vehicles?
Electric car company car tax rules provide several distinct advantages over those for petrol or diesel vehicles, making them a compelling choice for businesses:
- Low Benefit In Kind (BIK) rates
The first tax benefit of an electric company car is the low benefit in kind (BIK) rates that employees receive. BIK rates are used to calculate how much taxable benefit an employee receives from the company car. Therefore the lower the BIK rate the less tax an employee will need to pay on the vehicle.
The percentage of the list price of a company car which is taxed as a benefit in kind is determined by the CO2 emissions of the vehicle. The Benefit in Kind (BIK) rate is 2% for 2022/23, this is set to increase as we head towards the 2035 cut-off for the sale of new petrol and diesel vehicles.
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- Claim capital allowances on new EVs and chargers
A business can claim 100% first-year allowances on electric cars bought new and unused. 100% First-year allowances are also applicable to charging stations being fitted at an employee’s home. This means that the entire cost of the car and charger can be deducted from the profits of the company in the first year.
- Lease rental restriction
Businesses leasing an electric car can usually claim 100% of the VAT back on the monthly rental cost if the car is used only for business. If it is also used for private purposes, 50% of the VAT can be claimed.
- National insurance contributions (NICs)
Lower BIK rates on electric cars also mean lower Class 1A National Insurance contributions for employers.
- Vehicle Excise Duty (VED – or road tax)
Fully electric vehicles costing less than £40,000 are exempt from VED, also known as road tax. This exemption is set to last until 2025 after 2025 electric cars will pay road tax.
- Salary sacrifice schemes
Employees can benefit from an electric car salary sacrifice scheme, where they forgo a portion of their pre-tax salary to cover the cost of an electric company car. This results in lower income tax and National Insurance contributions.
Can I claim for charging my car from home?
It is possible to claim for charging your EV from home, however, many varying scenarios can potentially trigger an additional benefit in kind cost.
The Benefit In Kind position for charging electric cars will depend on these factors:
- Is the EV a company or personal car?
- Is the EV used exclusively for business purposes? private purposes or both?
- Where is the car located when charged and who provides the electricity?
If the electric vehicle is a company car (not personally owned) and is used for business purposes, the cost of charging it at home can be claimed back as a business expense. The business can reimburse the employee for the cost of the electricity used for business travel without it being considered a taxable benefit. This can be done either by calculating the actual cost of the electricity used or by paying a mileage rate.
For the actual cost method, it’s important to keep records of business journeys so the electricity used for business travel can be separated from personal use. The rules on company car tax are complex and you should agree to the workplace approach in-house before you claim.
What are the recent company car tax changes?
The most recent change in the company car tax rules involves the Benefit-In-Kind (BIK) allowances, a significant factor that determines the company car tax liability for both the employer and the employee.
The BIK tax rate, which is the percentage of the car’s value that is taxable, is set to increase gradually each year from the tax year 2025/26 to 2027/28. This annual increment is fixed at 1%. Therefore, by the end of the tax year 2027/28, the BIK rate for electric vehicles will be 5%, a rise of 3% from the 2024/25 rate of 2%.
What this means is that if you’re driving a company EV, you will be taxed on 5% of its value as a benefit, compared to 2% in 2024/25.
Despite this increase, it’s crucial to remember that EVs are still considerably more tax-efficient than petrol or diesel company cars.
What are the Capital allowances for electric cars?
Capital allowances let businesses write off the costs of tangible capital assets, like machinery or vehicles, against their taxable income.
In the UK, electric cars are eligible for a 100% First Year Allowance (FYA). This means businesses can deduct the full cost of the electric car from their pre-tax profits in the year that they purchase it.
The 100% FYA is very beneficial for businesses because it can mean a significant tax saving in the year of purchase, helping to offset the often higher purchase price of new electric vehicles compared to petrol or diesel cars.
The 100% FYAs are available for new electric cars. For used electric cars, businesses can claim a main rate writing down allowance of 18% or a special rate writing down allowance of 6% depending on the CO2 emission level of the vehicle.
Is there Capital gains tax on cars?
For the average EV owner, there is no capital gains tax (CGT) due when you sell a car because vehicles are usually classed as “wasting assets“. This term refers to assets that have a predictable life of 50 years or less, according to UK tax law.
However, if the car was used for business purposes and was part of the business’s assets then CGT will be due. Additionally, if you dispose of the car in a manner that makes you a profit, you may be subject to capital gains or corporation tax. For instance, if your car is traded in for another and the value received in the trade-in surpasses the initial purchase price of the vehicle, you might have a tax obligation.
Can you claim back vehicle road (VED) tax on EVs?
Road Tax (VED) is not typically a cost that businesses can recover or claim back. Vehicle Excise Duty (VED) is generally considered a running cost associated with a vehicle and isn’t deductible against corporation tax.
Currently, there is no Road Tax (VED) on Electric vehicles. However, this is to change in April 2025, when this changes you will be able to claim Corporation Tax Relief on this cost for company cars.
Can you pay for an electric company car through a salary sacrifice?
It is possible to pay for an Electric company car through the Electric Vehicle Salary Sacrifice Scheme. This is a common and often beneficial arrangement for both employees and employers in the UK.
In a salary sacrifice scheme, an employee agrees to give up a portion of their pre-tax salary in exchange for a non-cash benefit, such as an electric company car. The amount of salary sacrificed is often equivalent to the cost of leasing the vehicle.
This setup can have 3 main advantages:
- Tax Efficiency
Since the salary sacrifice comes out of pre-tax salary, it reduces the employee’s taxable income. This can result in lower income tax and National Insurance contributions for the employee and lower National Insurance contributions for the employer.
- Electric Vehicles and Benefit-In-Kind
Electric vehicles have much lower Benefit-In-Kind (BIK) tax rates compared to traditional petrol or diesel cars. This makes them particularly attractive for salary sacrifice schemes, as the tax savings can be substantial.
- Environmental impact
Salary sacrifice schemes that promote the use of electric vehicles align with environmental sustainability efforts by incentivising cleaner, greener transportation options.
However, it’s important to bear in mind that salary sacrifice schemes can have implications for things like loan applications or pension contributions, as they effectively reduce your income.
Is there VAT on company car tax?
Company car tax, also known as Benefit-in-Kind (BIK), is not subject to Value Added Tax (VAT) because it’s not a sale of goods or services, which is what VAT is designed to tax. VAT is a consumption tax that is added to the price of goods and services that consumers purchase.
BIK, on the other hand, is a type of income tax. It’s a tax on the value of benefits that an employee receives “in kind” as a result of their employment, over and above their cash salary.
Is there corporation tax relief on leased electric cars?
Yes, there is corporation tax relief on leased electric cars. Businesses in the UK can claim the cost of leased electric cars as a deductible expense when calculating their profits for corporation tax purposes. This means they can reduce their taxable profits, and hence their corporation tax bill, by the amount they spend on leasing electric cars.
Since April 2018, there is an additional incentive of a 100% first-year allowance (FYA) for businesses that purchase electric vehicles or vehicles with very low CO2 emissions. This means businesses can deduct the full cost of these vehicles from their profits before tax in the year they make the purchase.
What are the tax differences between leasing an EV VS purchasing an EV?
The tax implications of leasing versus purchasing an electric vehicle vary depending on whether you’re an individual or a business:
Leasing an EV
- For Businesses
If a business leases an EV, the lease payments are generally tax-deductible as a business expense. This effectively lowers the business’s taxable income and, by extension, its corporation tax bill. If the EV is provided as a company car for an employee, the employee will have to pay Benefit-In-Kind (BIK) tax, but the BIK rates for EVs are considerably lower than those for petrol or diesel cars.
- For Individuals
If an individual leases an EV, they cannot claim a tax deduction for the lease payments as these are considered personal expenses. However, individuals who receive an EV as a company car will benefit from lower BIK rates.
Purchasing an EV
- For Businesses
If a business purchases an EV, it can typically claim a 100% first-year allowance (FYA) for vehicles with low CO2 emissions, which allows them to deduct the full cost of the EV from their profits before tax in the year they make the purchase. However, this is subject to certain conditions and the car must meet the qualifying low-emission criteria.
- For Individuals
Individuals who purchase an EV can’t claim a tax deduction for the purchase price. However, if the EV is used as a company car, they will benefit from lower BIK rates.
Can I claim mileage on my leased electric car?
You can claim mileage on your leased electric car, assuming that the travel is business-related. The rate at which you can claim business mileage is set by the HMRC:
- 45p for the first 10,000 miles
- 25p thereafter
If a business is reimbursing an employee for business miles in a company electric car, the current rate is 9p per mile. Here’s our full guidance on claiming HMRC mileage in an electric car.
It is not possible to claim for travel between home and a regular work location – this is considered commuting and is not claimable. You can claim for travel to a temporary work location or for other business-related journeys.
If the company pays you less than the HMRC-approved amount, you can claim the difference on your tax return. If your company pays you more than the HMRC rate, the additional amount is considered income and may be taxable.
What are the most tax-efficient company cars?
The most tax-efficient company cars are without a doubt electric cars. This is because the UK government has implemented policies to encourage the adoption of EVs as part of their strategy to reduce greenhouse gas emissions.
The tax efficiency of company cars is determined by their Benefit-In-Kind (BIK) rate, which is how company cars are taxed in the UK. The BIK rate is a percentage of the car’s list price that is added to your income and taxed at your marginal rate. The rate is determined by the car’s CO2 emissions and its zero-emission mileage (if it’s a hybrid).
The BIK rate for pure electric vehicles is 2%, it is set to remain at this level until 2024-2025. This is significantly lower than the BIK rates for petrol and diesel cars, which can be as high as 37%.
Plug-in hybrids can also have relatively low BIK rates, depending on their electric range. The longer the range, the lower the BIK rate.
What is the cost of an electric company car compared to a petrol company car?
EVs cost more to buy or lease than a petrol equivalent, however, with the tax and fuel-saving benefits available to EV owners the cost comes down significantly.
To compare the cost between an electric company car and a petrol company car, you need to look at a range of factors:
1. Initial purchase or lease cost
Electric cars tend to have a higher upfront cost than petrol cars, although the gap is closing as technology advances and economies of scale come into play. However, when considering a company car, this cost may be spread out in the form of a lease or finance payments, reducing the initial financial impact.
2. Fuel VS Charging costs
EVs are usually cheaper to ‘fuel’ than petrol cars. The cost of electricity is generally lower than the cost of petrol, and this can result in significant savings over time.
3. Tax savings
The Benefit-In-Kind (BIK) tax for EVs is lower than for petrol cars in the UK. Making EVs more cost-effective from a tax perspective.
4. Maintenance costs
EVs typically have lower maintenance costs than petrol cars. They have fewer moving parts and don’t require oil changes, which can result in lower servicing costs over the vehicle’s life.
5. Residual value
The residual value of EVs can be somewhat uncertain, as the used market for these vehicles is still developing. However, demand for used EVs is growing, and this may help to support their residual values in the future.
Overall, while the upfront cost of an electric company car might be higher, the total cost of ownership over time can be lower than a petrol car when you factor in lower fuel, tax, and maintenance costs. This is evidenced in a study by the International Council on Clean Transportation in the US. They found that EVs can have a lower total cost of ownership than petrol vehicles, even when the purchase price is higher.
How long do electric company cars take to charge?
Charging time for electric vehicles (EVs) in the UK varies depending on the size of the battery, the speed of the charging point, and the current level of charge in the battery. Here are the main types of charging in the UK and their usual timeframes:
- Standard Home Charging (2.3 kW)
This type of charging uses a standard household electrical socket using a charger known as a ‘granny charger‘ and can take 8-12 hours to fully charge a typical EV. It is the slowest method and most suitable for overnight charging.
- Home or Public Fast Charging (7-22 kW)
These charging points, found in homes with a dedicated EV home charger, at workplaces, and in public places, can charge an EV in 3-4 hours. The exact speed will depend on the charger’s power output and the car’s onboard charger capacity.
- Public Rapid Charging (50-150 kW)
These are usually found at motorway service stations and some other public locations. They can charge an EV to around 80% in 20-60 minutes, depending on the power output of the charger and the EV’s charging capability.
- Ultra-Rapid Charging (150 kW and above)
These are the fastest chargers and are less common but increasing in number. They can potentially charge an EV to 80% in 20 minutes or less, but the vehicle needs to support such high-speed charging.
Charging times can vary significantly depending on the specific electric vehicle and charger used, as well as the condition of the battery.
How far can electric company cars travel on a single charge?
How far an electric car travels on a single charge varies greatly between the different models of EVs, as well as a few other considerations. Most modern EVs will be able to travel for between 100 and 300 miles on a single charge, but there are some EVs that can go further – even up to 500 miles.
Several factors impact how far an EV can drive on a single charge:
The size (capacity) of an EV battery has the biggest impact on the range, the larger the battery the longer a car will drive for.
How the EV is driven
Driving at high speed or riding the brake will decrease range, as will using features like air conditioning, heated seats or heated steering wheels.
The performance of an EV battery is impacted by the outside temperature. A cold battery will mean more energy is used to heat the inside of the car, which leaves less energy for the range of the vehicle. Hot temperatures will degrade the battery over time, also decreasing the overall range.
How old is the battery?
Over time, the EV battery will degrade and the distance a car can travel on a full charge will decrease.
How can companies provide charging facilities at work?
If you are providing staff with electric company cars then it makes sense to invest in charging stations in the company car park. It’s a fantastic benefit to offer staff who may be struggling with the rising cost of energy at home.
Businesses could look to install renewable energy sources, such as solar panels. This demonstrates a corporate responsibility towards sustainability – a facet that will appeal to employees and potential new employees when it’s time to recruit new staff.
There are several grants available to UK businesses looking to reduce the cost of installing workplace chargers. The EV infrastructure grant for staff and fleets provides funding to companies who do not have the infrastructure in place to enable chargepoints to be installed.
The Workplace Charging Scheme provides funding for the actual EV chargers, a business can get a £350 discount on the cost of a new EV charging unit.
What are the potential negatives of an electric company car?
There are plenty of benefits to using EVs as company cars, let’s consider the potential negatives.
Batteries will degrade and can be expensive to replace, if you are leasing a company car then this is less of a concern.
The selection of EVs on the market in the UK is continuing to grow, but there are fewer options than in the petrol and diesel range.
Company cars may be required to cover long distances as staff use them to visit clients or suppliers. If the daily distances exceed the range then it is less convenient to rely on public chargers than petrol stations, as there are far fewer EV chargers.
The final word on electric company cars
Electric company cars are a great option for UK businesses, mainly due to their considerable financial, environmental, and operational benefits. Driven by supportive government initiatives, technological advancements, and a growing recognition of environmental responsibilities, businesses are actively transitioning to electric fleets.
Firstly, EVs offer significant tax benefits. The Benefit-In-Kind (BIK) rates for EVs are lower than for petrol or diesel cars, making EVs more cost-effective from a tax perspective. Additionally, businesses can take advantage of capital allowances, potentially achieving 100% first-year allowances for zero-emission cars, while leased vehicles can offer corporation tax relief.
The cost of operating EVs is also typically lower compared to petrol or diesel counterparts. This is due to lower fuel costs, reduced maintenance needs, and a growing charging infrastructure. Furthermore, employees using EVs can claim mileage expenses, and businesses can potentially recoup VAT on these claims.
However, the shift to EVs does come with new considerations. Charging times, while improving, can still be longer than traditional refuelling times, and businesses may need to invest in charging infrastructure at workplaces. Additionally, the upfront costs of EVs are typically higher, although this gap is narrowing and can be mitigated through leasing or salary sacrifice schemes.
Overall, as technology improves and government support continues, the case for electric company cars in the UK is becoming increasingly compelling. Businesses willing to embrace this transition will be well-placed to benefit from cost savings, enhanced sustainability, and improved employee satisfaction, while also contributing to the broader national goal of achieving net-zero emissions.
Electric Car Guide does not provide tax advice. This article is for informational purposes only and is accurate at the time of writing. Be aware that UK tax legislation may change and you should consult your accountant if you need advice specific to your personal circumstance.