The last few years have seen dramatic changes in the development of cars. Diesel cars are now known to be very polluting. There’s been a lot of negative press coverage and tax rates are increasing for diesel company cars. In fact, sales of diesel cars will be banned in the UK from 2030.
On the other hand, companies such as Tesla and Nissan are developing electric cars that are aiming for the mainstream car market. These cars are becoming more affordable, with greater mileage ranges as battery technology improves.
In April 2020 tax rates for electric company cars will drop dramatically. So, if you’re thinking of getting one, buying it through your limited company can save you tax.
There are 2 separate tax issues with a company car:
Firstly, the initial costs of the car – how much can you offset against your corporation tax bill?
Secondly, you’ll have to pay extra tax each year because you’re getting a “free benefit” from the company (using the company’s car) instead of your own.
Tax relief when you buy the car
For new fossil fuelled cars, a business can only claim up to 18% of the cost of the car against tax each year if it has CO2 emissions of 51g/km or more. For cars with a CO2 emissions of 111g/km or above, the claim is just 8%.
However, your company can claim for the full cost of a new and unused fully electric or low emission car if its CO2 emissions do not exceed 50g/km as a tax deduction in the year you buy it. The Government has announced this will remain in place to 5th April 2021.
The company buys a Nissan Leaf costing £30,000. You reduce your company’s next tax bill by an impressive £5,100, so the effective net cost of car is £24,900. It is important to note that the car needs to be new and first registered to the company. Second hand electric or hybrids do not qualify for a full tax deduction.
Low or no tax each year that you have the car
As a director of your company, most of the time you use your company car, it will be for private journeys. This includes commuting to and from your work (see our article here). HMRC will expect you to pay extra tax and national insurance, because you’re getting a “free benefit” from the company for your private (non-business) use of the car.
From April 2020 the Taxman will slash the electric car benefit rate from 16% to 0%. This means you can provide a tax-free car to yourself that can be used by you, your partner or children and there will be no additional tax to pay. The taxable benefit is set to rise to 1% from April 2021 and 2% from April 2022. Here’s an example for what your new tax bill would be at the 2% rate:
You buy a new electric car and the list price is £30,000
The amount of your benefit is £600 (£30,000 x 2%)
You pay £120 tax as basic rate tax payer.
The company pays £83 national insurance
Total annual cost: £203
You’ll need to pay this £203 every year that you have the car. But you have saved £5,100 in corporation tax, so the overall savings are still great.
Tax free electric
Electricity is excluded from the definition of fuel. Meaning your company can pay for and claim a full tax deduction to:
- Install a charging point at your home and/or place of work.
- Provide a charge card to allow you access to commercial or local authority charging points.
And there is no taxable benefit for you to report or pay.
Government plug-in grants
There are government grants available to help with the cost of charging installations. When introduced in 2011 the plug-in-car-grant offered up to £5,000 for any car with CO2 of less than 75g/km. The grants have been reducing as the uptake of electric cars increases. From March 2021 the grant is £2,500 for cars costing less than £35,000.
Any grant received is taxable income but is offset by the cost of the equipment.
The 0% rate will also apply to hybrid cars registered from April 6 2020, with emissions from 1-50g/km and a pure electric mile range of 130 miles or more. However, there is currently no hybrid car in the world with this range.
The current world’s best hybrid is a Hyundai IONIQ Plug-in and has an electric range of just 26 miles and CO2 emissions of 26g/km. It has taxable benefit rate at 16%. Based on the car costing £30,000, the annual tax cost would be £1,622. The benefit in kind falls to 14% from April 2020.
For any new cars registered after April 2020 the benefit rate is 12% rising to 13 % from April 2021 and 14% April 2022
Any hybrid (or petrol/diesel) with a CO2 emission of under 50g/km will still get a 100% Corporation Tax deduction on the capital cost of the car.
You can claim for full the cost against tax in the year you buy it, reduced for private use percentage. Unfortunately, the figures don’t stack up for self-employed dentists due to the small amount of business use on cars.
Unless you are a self-employed locum dentist driving high mileage every year, it wouldn’t be beneficial to purchase an electric car for tax reasons alone.
Finding electric and hybrid cars
From a Renault Twizy to a Porsche Taycan and everything else in between. There is a great website called Comcar that will help you easily search through all the makes and models with a CO2 emission figure of 0-50g/km.