Updated: 24-11-2022 for Autumn Statement
Encouraging electric car take-up
The last few years have seen dramatic changes in the development of cars. Diesel cars are now known to be bad for air quality. There’s been a lot of negative press coverage, and the tax rates are set to rise for fossil fuel company cars. Sales of new petrol and diesel cars will be banned in the UK from 2030.
On the other hand, companies such as Tesla and Nissan are developing electric cars aimed at the mainstream car market. These cars are becoming more affordable, with greater mileage ranges as battery technology improves.
In April 2020, to encourage the take-up of electric cars, the car benefit charge based on the car’s list price for providing an electric company car dropped from 16% to 0%. With the 100% deduction for the costs of purchasing or leasing, buying it through your limited company will save you tax and provide you with the cheapest way to own an electric car.
There are two separate tax issues with a company car:
- Firstly, the initial costs to purchase or lease the vehicle – 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 “benefit in kind” from the company (using the company’s car) instead of your own.
‘Company car meaning’
While ‘company car’ is the familiar phrase used for a dentist operating through their own limited company, and used through this article, a more appropriate term may be ‘employer-provided car’. The same rules apply If you are an employed dentist working for a sole trader, partnership or limited liability partnership.
Unfortunately, the figures don’t stack up if you are a self-employed dentist. By self-employed, I mean working as a sole trader, partner in a partnership or as a member of a limited liability partnership.
Self-employed dentists reduce their motoring costs for any private use. Due to the small % of business miles driven by dentists, the tax-deductible costs are significantly reduced.
Remember, driving from home to practice is not considered business use.
The two ways to provide a company car are as an outright purchase or leasing
For new fossil-fuelled vehicles or hybrid cars, a business can only claim 6% of the cost of the vehicle against tax each year.
However, your company can claim the total 100% cost of a new and unused fully electric vehicle as a tax deduction in the year you buy it. It is important to note that the car needs to be new or an ex-demonstrator and first registered to the company. The sales income will be 100% taxable when the new vehicle is sold.
Second-hand electric do not qualify for a full tax deduction. Second-hand electric cars can claim 18% of the cost of the car year on year on a residual value basis. When the vehicle is sold, a balancing allowance can be claimed.
Corporation tax will rise to a top rate of 25% from April 2023, and you might consider delaying your purchase to save tax at a greater rate.
See the worked examples below to see why there is minimal benefit in delaying your new electric car purchase until after April 2023. Surprisingly there is a tax planning opportunity to give an overall better tax result by using the 18% rate applied to second-hand vehicles to delay tax relief until the 25% rate kicks in.
Example 1 – purchase of a new electric car with 100% allowance pre-April 2023 tax rise:
The company buys a Nissan Leaf costing £30,000. You reduce your company’s next tax bill by an impressive £5,100 (19%), so the effective net cost of the car is £24,900.
The company sells the car after three years for £10,000. The company has a tax to pay of £2,500 (25%).
Over the three years, the net cost is £17,400.
Example 2 – purchase of a new electric car with 100% allowance post-April 2023 tax rise:
The company buys a Nissan Leaf costing £30,000. You reduce your company’s next tax bill by a more impressive £7,500 (25%), so the effective net cost of the car is £22,500.
The company sells the car after three years for £10,000. The company has a tax to pay of £2,500 (25%).
Over the three years, the net cost is £15,000
Example 3 – purchase of a new electric car without 100% allowance pre-April 2023:
Before April 2023 and the pending 25% tax rate introduction, the company buys a new Nissan Leaf costing £30,000.
The company knows it doesn’t have to claim at the new car 100% rate for new electric vehicles, and it restricts its claim to the 18% used for a second-hand electric vehicle.
It can claim costs of:
- £5,400 (18%) in year one saving £1,028 (19%)
- £4,429 (18%) in year two, saving £1,107 (25%)
- £3,360 (18%) in year three, saving £840 (25%)
The company sells the car after three years for £10,000.
Cumulative allowances of £13,189 have been claimed. The company will claim a balancing allowance of £6,811 (£30,000-£13,189-£10,000), saving a further £1,702 (25%).
Over the three years, the net cost is £15,323.
By not claiming the 100% rate and using the 18%, the company saves an additional £2,077 in tax.
Example 4 – purchase of a used electric car:
Second-hand electric do not qualify for a full tax deduction. Second-hand electric cars can claim 18% of the cost of the car year on year on a residual value basis
The company buys a used Nissan Leaf costing £10,000.
It can claim costs of:
- £1,800 (18%) in year one saving £342 (19%)
- £1,476 (18%) in year two, saving £369 (25%)
- £1,120 (18%) in year three, saving £280 (25%)
The company sells the car after three years for £5,000.
Cumulative allowances of £4,396 have been claimed. The company will claim a balancing allowance of £604 (£10,000-£4,396-£5,000), saving a further £151 (25%).
Over the three years, the net cost is £4,858.
2 – Company tax relief when leasing an electric car
If you lease a new electric vehicle, you can claim the total cost of your lease payments each year.
Example 5 – leasing an electric car:
The company pays £3,600 in lease payments in one year. You will save £684 (19%) in tax every year you lease the car.
It makes no difference to the tax deduction if the car is new or used when leasing.
Leasing used to be less attractive due to the fixed term of a lease. If you have a change in circumstances, you have to keep paying the fixed cost of the lease or suffer an expensive early exit penalty.
However, leasing options now allow the company to cancel the lease without a cost to the employer. These are more expensive than standard leases.
Low benefits in kind give low personal tax and company national insurance each year that you have the electric car.
As a dentist, you usually use your company car; it will commute to and from work. Commuting to and from a place of work is considered to be a private journey (see our article here). HMRC will expect you to pay extra tax and national insurance because you’re getting a “benefit in kind” from the company for your private (non-business) use of the car.
However, the electric car benefit rate is meagre compared to cars with CO2 emissions. This means you can provide a vehicle yourself that can be used by you, your partner or your children with just a tiny additional tax to pay. The taxable benefit is currently 2% until March 2025, rising from 2025, but with yearly increases capped at 1% until 2028 to keep rates low.
Here’s an example of what your new tax bill might 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 a basic rate (20%) taxpayer
- The company pays £90.30 national insurance (15.05%)
- The total annual tax cost is £210.30
You’ll need to pay this tax every year you have a car.
You must file company forms (P46 car and P11D) with HMRC each year to calculate and pay the tax. See below.
Tax-free electricity (fuel)
Unlike fossil fuels, electricity is excluded from the definition of fuel. This means there is no benefit in kind to report and tax and your company can pay for and claim a full tax deduction on the following
- Installing a charging point at your home and place of work. Until 31 March 2023, new charging equipment purchases qualify for the enhanced 130 % super deduction
- providing a charge card to allow you access to commercial or local authority charging points
- recharging at work – where the company is responsible for paying the supplier.
- recharging at home – you need to keep records of your charging hours and the rate you pay for electricity when working out your repayment
- 8p per mile (5p to 1 December 2022) for business trips + 5p per mile if you have an employee/director/company secretary with you. You need to keep a mileage diary to support your claims. If your company provides for all your charging costs at work, home and charging points, claiming a mileage allowance for business isn’t considered in the spirit of the tax laws, even though nothing prevents it from being claimed. HMRC are due to an issue with further guidance in early 2023 about the interaction of the mileage allowance and company charging costs.
The tax-saving tip is your home electricity is supplied at a VAT rate of 5% business, and commercial charging is at a VAT rate of 20%, so if you have the same kwh price, charging at home is cheaper as you pay less VAT on charging at home.
The company will pay all motoring costs without giving rise to any further taxable benefits
In addition to the costs of the car, the company can pay for all the car’s running costs. These include:
- maintenance, services and repairs, including accidental damage
- battery and all other part replacements
- insurance – remember to insure as an employer-provided and not a personal car
- MOT after three years old
- washing, cleaning and valeting
- finance charges and interest on loans
- vehicle excise duty from April 2025
- There is no tax relief for parking fines, but as they are for a company vehicle, they are a company cost.
- Any penalties and fines issued to the driver, e.g. speeding, must be paid for personally.
If paying these costs from the company total £1,000 a year, you will save £190 (19%) corporation tax.
Remember, electric cars do not have to pay congestion and clean air charges.
Under the 2022 autumn statement plans, electric cars registered from April 2025 will pay vehicle excise duty at the lowest rate of £10 in the first year, then move to the standard rate, which is currently £165.
The standard rate will also apply to electric vehicles registered after April 2017.
The company can continue to pay for ferry and bridge crossings, road tolls and parking on all business travel. Parking close by a practice where you work can also be included.
A chauffeur is the only cost you will pay extra tax upon.
Keeping mileage records (well, maybe)
You can claim a mileage allowance of 8p a mile for electric vehicles for business journeys. See my earlier comment inn “Tax-free electricity (fuel)” about claiming mileage allowances when the company pays all charging costs.
If range anxiety is an issue and you have another petrol or diesel privately-owned car, you use it for business travel. You can continue to recharge the company the 45p a mile for business journeys in that car.
There are two government grants available:
- Electric Vehicle Homecharge Scheme to help with installing a charge point. The grant is set at 75% of the cost and is capped at £350. From April 2022, they’ll only be available to homeowners living in flats and rental accommodations.
- Plug-in grants of £2,500 towards the cost of a low-emission car costing less than £35,000.
The grant received are taxable income and offset by the equipment’s cost.
Hybrid cars are nowhere near as tax-efficient
Hybrid cars pack in a small but hefty battery and small combustion engine. This makes them heavy vehicles to move. This gives a surprisingly small electric engine range and high CO2 emission. The 2021 Toyota Prius hybrid has an electric range of about 30 miles and CO2 emissions of 94g/km.
The tax reliefs for hybrid cars are much less attractive than electric ones. If you are purchasing, your car can only claim 6% of the cost of the vehicle against tax each year for cars with CO2 emissions of over 50g/km or 18% if the emission is under 50g/km. For leased vehicles with CO2 emissions over 50g/km, 15% of the leasing costs are disallowed for tax relief.
The tax on the benefit in kind depends on the electric range and the CO2 emissions. Using a Toyota Prius hybrid with a 23% benefit on the list price as an example, you’d pay almost £2,000 in tax and NI each year.
Finding electric cars
From a Renault Twizy to a Porsche Taycan, there’s a wide range available today. There is a great website called Comcar that will help you quickly search through all the makes and models with zero CO2 emissions.
Tax planning considerations
- The London congestion charge discount for cleaner vehicles is to be discontinued from 25 December 2025
- The generous 2% benefit in kind has been confirmed only to 5 April 2025, rising by 1% until 2028. Before introducing the 2020 0% rate, electric cars were set at 16%. There are calls from the motor industry to commit the government to set the benefit-in-kind rates beyond 2028 to give car owners peace of mind.
- We have seen the exemption from vehicle excise duty from electric vehicles removed from 2025, and as more and more electric cars are taken up, government revenue fuel duty will fall. Whilst there is no overhaul expected of how road taxes are charged, it is expected from commentators that electric vehicles will not continue to enjoy exemptions from fuel duty for many more years to come.
- Although not covered in this article, if you are an employed dentist, you can enter a salary sacrifice arrangement with your employer to provide you with an electric car. The advantage of this is a national insurance saving for both employers and employees. Pension arrangements need to be considered as there will be a reduction in contributions or final salary entitlement.
- Corporation tax rates are due to rise from April 2023 to 25% from 19%. Waiting until April 2023 to purchase a new car will result in more significant tax savings.
- If you didn’t want to wait until April 2023, it would be worthwhile to look at your future cash flows attributable to a new car and take advantage by not claiming the 100% allowance on the purchase as shown in the pre-April 2023 example.
Tax forms are to be filed with HMRC
You are going to need to file the following forms to report to HMRC the car is available for private use:
- P46 Car is needed when the car has been provided and changed or withdrawn. There are deadlines for filing the form linked to the date when the change occurred. Once HMRC has the form, they will update your PAYE tax code to include a car benefit. This reduces your tax-free pay allowance and will collect any income tax due through your monthly director’s salary payments.
- P11d – annually reports the total of all the company taxable benefits you have been provided with. A second part of the form is known as a P11d(b). It works out the employer’s National Insurance charge, Class 1A. The Class 1A payment is due to HMRC by 22 July, and any other PAYE is expected and is accounted for as a company expense qualifying for Corporation Tax relief. The filing deadline is by 6 July.
- Personal tax return – you will file an annual tax return to report your director’s salary and shareholder dividends. As reported on form P11d, the value of car benefits will be added to your tax returns employment section with your salary.
There is an alternative to form P11d known as payrolling benefits and expenses. This allows you to report your benefits to HMRC using the company payroll and bypass form P11d. The company must be registered to set this up with HMRC before starting the tax year. However, a form P11d(b) still needs to calculate and report the Class 1A National Insurance. Not all benefits can be payrolled. There may still be the need for P11d to be prepared. Payrolling benefits this way isn’t suitable for micro employers like associate dentists.
Having an electric car provided by your company is the cheapest way to drive an electric vehicle.