Starting from the 2019/20 tax year, HMRC have offered a package of generous allowances for electric vehicles and ultra-low emission
vehicles (<50g of Co2 per km). In the past, putting a vehicle through your Limited Company instead of purchasing it yourself has often represented poor value from a tax perspective in exchange for the few benefits a company car could potentially offer.

There are a few factors to consider if you are about to go and look at an electric vehicle to check if it will qualify under the rules. The electric range of the car, its total emissions, and its purchase price - HMRC have a handy calculator available to help you make your choice, see here.

Dependent on how much you want to spend, for qualifying vehicles with a value of less than £35,000 the government is also currently offering a ‘Plug-in Car Grant’ to pay for up to 35% of the vehicles value, up to a limit of £2,500.

Corporation Tax Savings

A brand new and unused electric or ultra-low emission vehicle purchased through a limited company will be eligible for 100% first year capital allowance relief. This means that, unlike other vehicles which are subject to a much lower allowance spread over the course of several years (often beyond their useful lifetime), an electric car can be claimed for its full value in the first year.

In order to take full advantage of the of the allowances on offer, the vehicle must be purchased brand new and unused. Second-hand models will not receive the 100% first year capital allowance relief that a new vehicle does.

For instance, a new electric vehicle is purchased by your company – let’s say a new Tesla Model 3, which costs £41,000. As it qualifies under the rules, the full £41,000 can be offset against your profit for the year, representing £7,790 of corporation tax savings (£41,000 x 19%).

Further, any maintenance on the vehicle can also be put through your company. A repair bill of £500 will represent another £95 of relief (£500 x 19%).

It’s important to note here, that if you sell the vehicle for any reason in the following years, this disposal will have the opposite effect on your corporation tax. A vehicle sold on for £15,000 will add £2,850 on to your tax bill (£15,000 x 19%).

Benefit in Kind (BiK)

A company car used for personal use by an employee of the company incurs an annual benefit in kind tax charge, based on a number of factors including it’s emissions rating and the retail value of the vehicle.

The table below illustrates the percentages of the retail value this calculation is based on, which is dependent on the emission rating of the vehicle.

Emissions g/km CO2	Electric Range (Miles)	2021-22 %	2022-23 %*	2023-24 %*
0	N/A	1	2	2
1< 50	>130	1	2	2
1< 50	70- 129	4	5	5
1< 50	40- 69	7	8	8
1< 50	30- 39	11	12	12
1< 50	<30	13	14	14

*Subject to confirmation by Finance Bill

So, using this table, let’s look at the benefit in kind charge for our Tesla Model 3 from the previous example. The car is fully electric with zero-emissions, so for 2021-22 we can see our basis percentage is 1%.

• We calculate the full value of £41,000 x 1% = £410.
• Our employee is a basic rate taxpayer at 20% (up to £50,000 income), so we can work out that the tax applicable on the BiK would be £82 for the year (£410 x 20%).

If the employee is a higher rate taxpayer (income over £50,000), the second part of the calculation changes to:

• £410 x 40% = £164

For 2021-22, this charge would go up, as the percentage of the value has now increased to 2%, so now our calculation looks like this:

• £41,000 x 2% = £820
• £820 x 20% = £164

When compared to a new petrol or diesel car of similar value we can see there is a large tax saving to be made here. A 2021 BMW 5 Series for example costs £39,000 to purchase. However, unlike the electric vehicle with it’s zero-emissions rating, the BMW cannot be claimed under the 100% first year
allowance and has a CO2 rating of 108.0g/km, attracting a BiK percentage of 26% in 2021-22.

Using the same method as before, we can see that the BMW would therefore attract a tax charge on the benefit in kind of £2,028 – a far more costly option than the Tesla, even though the initial purchase price is £2,000 lower! The calculation is based on the same purchase price every year.

Along with a much lower annual tax charge on the benefit-in-kind, it’s worth mentioning that the electricity used to charge an electric car is not actually classed as road fuel, so the car fuel benefit charge that usually applies to a diesel or petrol vehicle is not applicable to our Tesla Model 3.

Employers NI

Employers National Insurance is payable by the company on any benefits in kind, at a rate of 13.8% (due to go up to 15.05% from April 2022), and this is another thing to consider when purchasing a car through your limited company.

This is calculated much in the same way as before. For the Tesla Model 3 that would be £410 x 13.8% = £56.58 Employers NIC payable.

Leasing an electric car

A cost-effective way to drive an electric vehicle without having to tie up any of your company’s capital in a purchase is to obtain the vehicle on a lease. This allows for an employee to use the car, taking advantage of the generous BiK tax rates for personal use, whilst allowing the company to claim back 50% of the VAT on the lease and deduct the whole cost for corporation tax purposes.

Let’s look at a quick example. We obtain our Tesla Model 3 on a lease costing £350 + VAT per month (£420). This amounts to an annual charge of £5,040, of which we can claim back £420 of VAT, leaving £4,620 deductible against our profit for the year.

Our employee’s tax on the BiK is still based on what the vehicle would cost if it were bought outright, so if they are a higher rate taxpayer, using our previous example we can see that in 2021/22 they would be charged £164.

Lastly, we add in our Employers NIC of £56.58, leading to a total annual cost of £4,840.58 plus £420 of reclaimable VAT.

On average, a lease on a vehicle runs for 36 months, so let’s look at the total expected cost over the period, adjusting our numbers to include the predicted BiK rates for the subsequent years:

• 2021/22 - £4,840.58
• 2022/23 - £5,071.41 – calculated using 2% rate for BiK and 15.05% for Employers NIC
• 2023/24 - £5,071.41 – calculated using 2% rate for BiK and 15.05% for Employers NIC
• Total cost over lease period = £14,983.40 plus £1,260 VAT of which:
  • £13,860 is lease costs - deductible against company’s profit for corporation tax savings of £2,633.40.
  • £303.40 is Employers NIC - deductible against company’s profit
  • £820 is payable as income tax by the employee
  • £1,260 is reclaimable as VAT