With the current publicity that environmentally friendly policies are receiving, we are seeing more and more clients consider moving from diesel to electric cars in their businesses.
It is worth bearing in mind that there can be considerable differences in the tax treatment of electric cars, usually beneficially.
The business perspective
The tax relief available on the purchase of a car by a business entitled to claim capital allowances can be significantly affected by the carbon dioxide emissions of the car being purchased. A fully electric car will have an emissions rate of zero grams of carbon dioxide per kilometre (often shown as g/km).
For cars with an emissions rate of 50g/km or less, a 100% first year capital allowance is available. Some hybrid cars will also fall into this category.
Contrast this with cars that fall into the emissions bracket over 50g/km and not exceeding 110g/km, where an 18% annual “writing down allowance” is available. After four years of ownership, just under 55% of the cost will have received tax relief.
Even slower tax relief is obtained where the emissions rate exceeds 110g/km. The annual writing down allowance for these cars is reduced to just 6% per annum. In this case, only 22% of the cost will have received tax relief after four years.
For example a company purchasing a qualifying car for £40,000 would receive the following tax reliefs over the first four years of ownership (assuming a 19% corporation tax rate):
Rate of emissions |
Tax relief obtained after 4 years |
|
0 - 50g/km |
£7,600 |
|
Over 50g/km - 110g/km |
£4,164 |
|
Over 110g/km |
£1,666 |
The personal perspective
Car emission rates can also have a significant effect on the “benefit in kind” charges that apply when employees and directors are provided with a company car for private use.
Significant changes were made from 6 April 2020 with the effect being that purely electric cars will give rise to a much lower benefit in kind charge.
The new charges are based upon a combination of emissions rate, and the mileage that an electric / hybrid can achieve without emitting any carbon dioxide.
A purely electric car, emitting no carbon dioxide at all, will be subject to a 0% benefit in kind rate using the new rates. The percentage charge is applied to the list price of the car to arrive at the taxable benefit in kind.
So regardless of cost, an electric car will give rise to no benefit in kind during 2020/21. The percentage rates are due to increase to 1% in 2021/22 and 2% in 2022/23. So in 2022/23 a car with a list price of £40,000 would give rise to a benefit in kind of £800 per year. For a 40% taxpayer, the annual tax payable would be £320.
Contrast that with a car that emits 51g/km. The benefit in kind rate applying to that, still relatively clean car, will be 15%, giving rise to an equivalent benefit in kind of £6,000 and an annual tax bill for a 40% taxpayer of £2,400.
The taxation of private fuel is also significantly different for a pure electric car. For a car that uses petrol or diesel (including hybrid cars) a “fuel benefit charge multiplier” applies (£24,500 for the 2019/20 tax year). The same benefit percentage that is charged to arrive at the car benefit is then applied to that multiplier.
However for a purely electric car, there is no benefit in kind charge for the provision of free charging at the workplace.
If you would like to discuss the specific tax effect of purchasing an electric car for you or your business, please get in touch with your usual Streets contact.
