A significant number of employers offer company cars to their employees, particularly if their day-to-day job requires them to travel. Over the years though, the tax environment relating to company cars has changed.

This can make the idea less attractive for both employer and employee, so we look at the tax rules relating to company cars, and whether electric cars offer a more attractive proposition than their petrol or diesel rivals.

How does HMRC view company cars?

The answer to this depends on what you’re using your vehicle for. When a company car is used for personal reasons, for example, on a trip to a supermarket or to drop the kids off at school, the tax authorities see a company car as a perk.

Consequently, they treat it as a taxable benefit, or benefit-in-kind, for tax purposes, which has implications for both the company and the individual.

How do Benefit in Kind charges affect company cars?

A company car is treated in the same way as other benefits-in-kind, such as private health insurance or the provision of a mobile phone for personal use. It benefits the employee, so:

• The individual must pay tax on the value of this benefit.
• The employer must pay Employer’s National Insurance (NI) on the value of the benefit.

These extra charges can mean that owning a company car through a limited company isn’t that tax efficient if you’re the owner and director. That’s because you’ll pay the tax twice: once as the individual receiving the benefit, and again as the company which is effectively your employer.

It’s the employer’s responsibility to tell HMRC about any benefits-in-kind, including company cars, by filing a P11D report. This is so that the employer and individual both pay the right amount of tax on the benefit.

The tax year runs 6th April to the following 5th April, irrespective of when your company year-end might fall.

Working out how much tax you’ll pay on a company car

First things first. The tax payable on a company car is worked out by:

• Calculating the P11D value (which we’ll explain next)
• Multiplying this by the percentage rate of income tax that you pay (which depends what rate of taxpayer you are)
• And by applying a percentage charge which depends on the vehicle’s emissions.

That bit about emissions is particularly crucial when it comes to understanding why electric cars have greater tax benefits than petrol or diesel ones.

How do I calculate the P11D value?

We’ll expand on these, but in short, the P11D takes into account:

• List price
• How many days the car was available
• Capital contributions
• Engine size, fuel type, and CO2 emissions (and this is where the electric car stands out)

We show some examples of how to work this out in the tables below.

List price

The principal part of the P11D calculation for a company car uses its list price as the starting point.

The list price is defined as the price of the car at the point it was made available to the employee. It includes the cost of any other accessories that were optional extras, and the addition of VAT.

How many days the car was available

You then need to consider how many days the car was available in the year. Remember that the value is based on how many days within that tax year.

Capital contributions

Deduct any ‘capital contributions’ made by the employee. The employee may contribute up to £5,000 for the vehicle, and these contributions are deductible for tax purposes. Basically, the more the employee pays personally, the lower the value of the benefit, which means less tax.

Similarly, in some cases, an employer might agree that an employee may contribute towards the costs of the private use of their car.

Any such value must be agreed in advance of the employee using the car and, for example, can’t simply be an estimate of petrol and oil they’ve used.

Engine size, fuel type, and CO2 emissions

The engine size, fuel type and CO2 emissions of the vehicle all need to be taken into account, and it’s here that you’ll find the tax benefits of an electric car.

The CO2 figure that’s important for the vehicle is the one from the vehicle’s first registration. This value is set for the life of the car, regardless of what your MOT test might show.

If it sounds complicated, that’s probably because it is! Fortunately, the government has a handy calculator tool available. We’ll explain how all this information fits together next!

So, what are the benefits of electric vehicles in a limited company?

The government has made efforts to move employer fleets from petrol and diesel to greener options via company car taxation.

Whereas a petrol or diesel car attracts a percentage charge of 30% or more, electric vehicles are chargeable at a much lower rate. In the current tax year, this is just 1%.

While this is set to rise in coming years, it will only do so modestly, to 2% for 2022/23 and 2023/24.

If you’ve not gone fully electric, it is important to note that petrol-electric hybrids are charged in the same way as petrol cars after considering the vehicle’s electric mileage range. So, let’s look at some of the rates and then some practical examples:

Tax bands and rates for benefits in kind in 2021/22

As you can see, the zero or very low emissions of electric vehicles or efficient hybrids will significantly affect the value of the benefit-in-kind.

An example of employee tax and employer’s NI for company cars

To really get up to speed (all driving puns intended), let’s looks at how different CO2 emissions affect the tax. We’ll compare examples of petrol, hybrid, and fully electric vehicles.

It’s worth another mention that it’s not just the employee who will pay tax. The employer will also pay Class 1A National Insurance contributions (NICs) on each vehicle that they provide to an employee for personal use. The table below shows how to work out both the employee tax and employer NI.

So what does that look like if you’re the owner/director of your own limited company, and being taxed as both an employee and as an employer?
If you pay 40% tax as well as employer NICs£2,771 + £955.93 =
£3,726.93£940 + £324.43 =
£1,264.43£114 + £39.19 =
£153.19

In that scenario a petrol company car isn’t very tax efficient at all, but an electric car is far more manageable.

Are there any other advantages of providing electric company cars?

As you can see, there are significant tax advantages of moving your company car fleet to electric vehicles, but that’s not all. There are some other advantages of switching.

Fuel Charges

Firstly, electricity, unlike petrol and diesel, is not classed as a ‘fuel’. There is no need to levy any employee fuel benefits, and consequently, there’s no Class 1A NI charge for the employer.

Mileage allowances

Mileage is paid based on the size and type of engine. Whilst petrol and diesel cars pay the (higher) Advisory Fuel Rate, fully electric cars pay the Advisory Electricity Rate of 4 pence per mile.

To illustrate, an employee who travels 5,000 business miles in their fully electric company car during a year can make a mileage claim for the £200, free from any tax or national insurance contributions.

Capital Allowances

Capital allowances mean companies can claim tax relief on the assets they buy which, in turn, reduces their Corporation Tax bill.

Any expenditure on fully electric vehicles will have a 100% first-year allowance available. In short, they can claim tax relief on the full value of the asset. Leased cars and hybrid cars are not eligible for this allowance.

What about providing charging points?

In a further bid to incentivise the use of electric vehicles, the government also allows employers to install charging facilities and not treat recharging as a benefit-in-kind. This means that employees can recharge their vehicles “for free” whilst they’re at work.

Suppose employees work from home or are based at a location away from the company’s main site. In that case, employers can choose to pay for the installation of charging points at the home of the employee. Again, this is not treated as a benefit-in-kind, and there are no additional costs over and above what it cost to fit the charging point.

This tax exemption does not apply if the employer reimburses the costs of charging the employee’s vehicle away from the workplace, such as at a motorway service station.

How should companies account for electric company cars?

Essentially, the answer is the same as any vehicle that you provide. The benefit of electric cars is that the full capital allowance is available in the first year.

• Find out more about capital allowances for cars

If the vehicle is purchased using a hire purchase scheme, the total amount of the loan should be reported on the balance sheet. It would reduce each year as loan repayments are made. The interest element of the repayments is accounted for in the profit and loss account as an expense in the usual way.

If the car is leased with no option to purchase it, then it does not belong to the company. Instead, you would receive a reduction of the expense payable against your corporation tax rather than via the allowances above.

What are the VAT implications?

When it comes to VAT, the government does not view electric vehicles as different from any other car. This treatment means that you won’t be able to reclaim VAT on the purchase of the vehicle, whether petrol or electric. However, there is one caveat to this: you can claim VAT back if the vehicle is for business use only. That means no private use at all! In practice, this is often difficult to prove to HMRC.

As an example, the car would be considered as being 100% for business usage if it is left at the business premises overnight, and not driven home to your personal residence each day.

Getting a grant for new electric vehicles

The good news is that you can get a discount on the price of brand new low-emission vehicles. The newly named Office for Zero Emission Vehicles (OZEV) is the branch of the government responsible for issuing grants for new electric vehicles.

These grants are paid through a discount via vehicle dealerships and manufacturers, which also means there isn’t a complicated process for claiming it back. The dealer will simply include it in the vehicle price.

Do note that the only vehicles eligible for a grant are those that the government approve. The vehicle must cost less than £35,000, including VAT and delivery fees. The grant is then payable at 35% of this price, up to a maximum amount of £2,500.

Are there any downsides of company electric cars?

Electric vehicles are still a relatively recent phenomenon, even if it feels like they’ve been around forever. Generally speaking, they’re more expensive than petrol or hybrid alternatives. As an employer, just bear this in mind as your initial cash outlay will be higher.

There is also the question of practicality. The recharging infrastructure is still in its infancy, particularly if you live outside a major town or city. Consequently, recharging points can be few and far between. Of course, as we have seen, employers can assist their employees with the financial cost of fitting charging points at home and the provision of points at the workplace.

We’re all aware of the need to work harder to protect the environment. For employers seeking to demonstrate their commitment to corporate responsibility, providing electric vehicles as company cars sends a positive message to employees and customers alike.

For more information on this and other tax matters, don’t hesitate to talk to us! Call 020 3355 4047 to learn more about our online accountancy services, or get an instant quote online.

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About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.

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