The sale of cars fuelled wholly by diesel or petrol will be banned by 2030, according to the UK government’s ‘Ten Point Plan for a Green Industrial Revolution’.
A ban on the sale of hybrid cars is then set to follow from 2035 in a bid to accelerate the UK’s path to net zero.
Last year was a record year for electric vehicles sales, with more electric, (i.e. battery only) cars sold in 2021 than in the previous five years combined. In fact, of the 1.6 million cars sold in the UK in 2021, around 11 percent were pure electric vehicles.
And for employers who provide their employees with vehicles they can use privately, there are some substantial tax benefits on offer in the next few years for making the switch to pure electric.
Upfront tax relief
The first potential benefit for the employer is in respect of capital allowances. Businesses that want to buy a zero emissions or electric vehicle can benefit from 100 percent capital allowances until 2025 – provided that the car is new and unused (demo trips don’t count).
This means that – provided the business makes sufficient profits – the purchase cost can be written off immediately in year one. This is a particularly attractive incentive for owner-managed companies, especially where the company director might be looking for a new electric car for themselves.
If the business opts not to purchase but lease, then the lease payments for an electric car are fully deductible against tax for the employer, although VAT recovery is limited to only 50 percent of the VAT cost where the vehicle is used privately by the employee.
Benefit in Kind
Whether the car is bought or leased, the other major benefit of switching to electric – for both employee and employer – is the drastically reduced benefit in kind.
A taxable benefit in kind arises whenever an employer provides a car which can be used privately by the employee. The value subject to tax is calculated as a percentage of the car’s official list price, as published by the manufacturer.
The percentage for diesel and petrol cars increases the more polluting they are and can go as high as 37 percent. In contrast, for 2022/23, the percentage for an electric car is a very modest two percent – resulting in a much lower value for the taxable benefit in kind. This results in savings of income tax for the employee and Class 1A NIC for the employer.
Another advantage is that it is still possible for an employee to give up salary for their vehicle via salary sacrifice without being caught by the Optional Remuneration Arrangements (OpRA) rules. These rules mean that when an employee gets a choice between an amount of salary or a benefit, they are usually taxed on the higher of the cash equivalent of the benefit or the salary forgone. But where the employee gives up some salary for an electric car – or a hybrid emitting less than 75g/km of CO2 – then the employee can still only pay tax on the cash equivalent of the benefit in kind if this is less than the salary given up.
Charging up
Having got a pure electric car, it will need to be regularly charged and there are incentives for employers to provide workplace charging facilities so that employees can benefit from the convenience of charging while they are at work.
An employer paying to install electric charging equipment can claim 100 percent of the cost as a first-year allowance – again receiving immediate upfront tax relief – and they can also recover the VAT where the equipment is installed at their business premises. However, on the disposal of the vehicle any proceeds from the sale will be taxed, creating a balancing charge.
Better still, there is no benefit in kind for the employee if they charge their company car up at the work premises – even if they then use that charge for private miles. This again compares very favourably to the position where an employee provides diesel or petrol for private use, where the benefit in kind cost for private fuel can be very expensive. In fact, there is no benefit in kind applied to any employee who can charge up at, or near their workplace, even if the car is the employee’s own electric car rather than a company one, provided the facilities are available to all employees.
Out and about
Charging away from the workplace the position is a bit more complex, but where an employer has provided an employee with a company car they can also pay to install charging equipment at the employee’s home without creating a benefit in kind charge – although it is worth checking if there are any grants or deals to cover these costs with the manufacturer first.
The exclusion though will not cover the cost of the electricity needed to charge the vehicle – unless the electricity is supplied by the employer. If, as is perhaps more likely, the employee pays for the electricity used personally, then there are a couple of ways in which the employee can get relief for the cost of business travel only. Either the employer can reimburse the cost of electricity using the Advisory Fuel Rates for company cars which allow a payment of 5p per mile tax-free for business miles, or the employee can claim tax relief at the same rate (although the value of the tax relief is worth less than a reimbursement).
Act now
At the present time, the capital allowance benefits on the purchase of electric cars and installation of charging equipment, and the lower rate of benefit in kind on electric cars, are set to run until March 2025.
Given the looming 2030 ban, there is no guarantee how long these benefits will be retained so if employers want to take advantage of them, they should consider doing so sooner rather than later.