As the push towards greener transport intensifies, more businesses and individuals are considering the shift to electric vehicles (EVs). One of the most compelling reasons to make this transition, aside from the environmental benefits, is the array of tax advantages that come with owning or leasing an electric company car in the UK. With government incentives and reduced tax burdens, an electric company car can be a financially savvy choice for both employers and employees.
- Lower Benefit-in-Kind (BIK) Rates
Benefit-in-Kind (BIK) tax is a charge on employees who receive perks from their employer, such as the use of a company car. The amount of BIK tax payable is based on the car’s list price and its CO₂ emissions. One of the standout benefits of an electric company car is the significantly reduced BIK tax rate compared to petrol or diesel vehicles.
Image: Vauxhall
For the 2023/24 tax year, the BIK rate for a pure electric car is just 2%. This is in stark contrast to rates for traditional internal combustion engine vehicles, which can range from 15% to over 37%. The government has committed to maintaining these favourable rates, with slight increases planned in the coming years, ensuring electric vehicle drivers can still enjoy low tax rates well into the future.
- Capital Allowances for Employers
Employers who purchase electric vehicles for their fleet can benefit from generous capital allowances. The UK government currently offers a 100% First Year Allowance (FYA) on electric vehicles. This means that businesses can deduct the full cost of the vehicle from their pre-tax profits in the first year of purchase.
This tax relief can be a substantial financial incentive for companies, reducing their overall tax bill while investing in a greener fleet. For leasing companies, this also offers an opportunity to provide more competitive rates to clients.
- Zero or Reduced Vehicle Excise Duty (VED)
Vehicle Excise Duty, often referred to as road tax, is another area where electric vehicles offer savings. Fully electric vehicles with zero emissions are currently exempt from VED. For hybrid cars or plug-in hybrids with low emissions, there is also a significantly reduced rate compared to traditional vehicles.
From 2025, however, the government has announced that electric vehicles will no longer be fully exempt from VED, though they will still benefit from lower rates compared to their petrol or diesel counterparts. This change will come as electric vehicles become more mainstream, but the savings are still likely to be substantial compared to fossil fuel vehicles.
- National Insurance Contributions (NICs)
Employers can also benefit from reduced Class 1A National Insurance Contributions (NICs) on company cars. Since NICs are based on the value of BIK, and electric vehicles have much lower BIK rates, the amount an employer must pay in NICs for providing an electric company car is significantly less than for a petrol or diesel car.
- Lower Fuel Costs
Although not a direct tax benefit, it’s worth mentioning that the overall cost of running an electric vehicle is generally much lower than a conventional vehicle. Charging an EV is significantly cheaper than fuelling a petrol or diesel car, especially if the company has access to off-peak electricity rates or onsite renewable energy sources.
Businesses can also take advantage of the Workplace Charging Scheme, which offers a government grant towards the cost of installing EV charge points at the workplace, further incentivising the switch to electric.
- Congestion Charge and ULEZ Exemptions
Electric vehicles are exempt from paying London’s Congestion Charge and the Ultra Low Emission Zone (ULEZ) charges. This exemption can result in considerable savings for businesses that operate within or near these zones, especially for those regularly travelling into central London. Although the rules may change over time, at present, electric vehicles offer a clear cost advantage for urban travel.
- Salary Sacrifice Schemes
Electric vehicles can also be included in salary sacrifice schemes, where employees give up a portion of their gross salary in exchange for a benefit, such as the use of a company car. Due to the low BIK rates on electric vehicles, these schemes are particularly tax-efficient for employees. The salary sacrifice reduces their taxable income, while the employer still provides a valuable benefit.
Additionally, as employers save on NICs for these employees, it can be a win-win situation for both parties.
The tax benefits of choosing an electric company car are numerous and provide a strong financial incentive for businesses and employees alike.
With lower BIK rates, significant capital allowances, reduced VED, and savings on fuel costs, transitioning to an electric fleet not only aligns with the push towards sustainability but also offers tangible economic advantages. As the UK government continues to support the adoption of electric vehicles through various tax reliefs and incentives, now may be the ideal time for businesses to make the switch to greener transport.
For more information on how you can benefit from an electric company car, please contact us and we will be pleased to discuss your options.