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.
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
These extra charges can mean that owning a company car through a limited company might not be 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 provides it.
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.
You must file a P11D to report Benefits in Kind by 6th July following the end of the tax year it relates to.
The tax year runs 6th April to the following 5th April, irrespective of when your company year-end might fall.
How much tax will I pay on a company car?
The amount of tax you pay on a company car is worked out by multiplying the P11D value (which we explain next) by the rate of income tax you pay, and then multiplying that amount by the vehicle’s emissions-based BiK rate.
We’ll translate all the jargon in the next section, but the point about a vehicle’s emissions affecting how much tax you pay is particularly crucial. It means electric cars usually have greater tax benefits than petrol or diesel ones.
How do I calculate the P11D value of a vehicle?
Working out the P11D value of a company car takes into account its list price, how many days the vehicle was available, capital contributions, and the vehicle’s engine size, fuel type, and CO2 emissions (which is where the electric car stands out). It gets a bit confusing, so we explain what each of these terms mean below, and include some examples of working everything out.
What does list price mean in a P11D calculation?
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, and includes the cost of any other accessories and optional extras, as well as VAT.
How many days was the car 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.
Employee capital contributions for company cars
Employees can make up to £5,000 of ‘capital contributions’, which are payments towards the cost of the vehicle and any accessories. These capital contributions are deductible for tax purposes. Basically, the more the employee pays personally, the lower the value of the benefit, which means less tax to pay.
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 the 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.
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What are the benefits of using electric vehicles in a limited company?
The government has made efforts to move employer fleets from petrol and diesel to greener options by making the tax on electric vehicles more attractive. 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 2%, and these rates are frozen until the 2024/25 tax year.
If you haven’t 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:
2023/24 Company car tax rates
We’re including these tables to show some of the rates in use for the 2023/24 tax year, so that we can explain how to use these values to calculate tax for a company car. A complete list is available on the HMRC website.
As you can see, the zero or very low emissions of electric vehicles and efficient hybrids significantly affect the value of the Benefit-in-Kind.
How do I work out employee and employer tax and 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 employees who pay tax on the value of any benefits they receive (such as these company cars we’ve been talking about). Employers make National Insurance Contributions (NICs) on BiKs too, such as each vehicle that they provide to an employee for personal use.
Our table below shows how to work out the cost of these contributions, to help you understand what this might mean for your business – particularly if you’re the director of your own company.
Volkswagen Golf 1.5 TSI
Volkswagen 1.4 TSI eHybrid
Mini Hatchback Electric 135kW
Electric mileage range
The tax percentage rate based on emissions Use the tables above to find the correct rate for the vehicle based on its emissions and electric mileage range.
The P11D value Multiply the list price by the tax percentage rate to calculate the Benefit-in-Kind (BiK)
£24,740 x 29% = £7,174
£33,585 x 12% = £4,030
£28,445 x 2% = £568
How much tax the employee pays Multiply the BiK by the rate of income tax. In this example we assume the employee is a higher rate taxpayer.
£7,174 x 40% = £2,869
£4,030 x 40% = £1,612
£568 x 40% = £227
How much NI the employer pays Multiply the BiK by the rate of employer’s NI (which is 13.8%)
£7,174 x 13.8% = £990
£4,030 x 13.8% = £556
£568 x 13.8% = £78
So what does that look like for a company director? Assuming you’re a director in your own company
£990 + £2,869 = £3,859
£556 + £1,612 = £2,168
£78 + £227 = £305
In this example a petrol company car isn’t very tax efficient, but an electric vehicle might be 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 beyond those there are other advantages to switching.
Electricity, unlike petrol and diesel, is not classed as a ‘fuel’. There’s no need to levy any employee fuel benefits, and consequently, there’s no Class 1A NI charge for the employer.
Mileage is paid based on a vehicle’s engine size and type. Whilst petrol and diesel cars pay the (usually higher) Advisory Fuel Rate, fully electric cars pay the Advisory Electricity Rate. From 1st September 2023 the Advisory Electricity Rate (AER) is 10 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 £500, free from any tax or National Insurance Contributions.
Although this doesn’t include leased or hybrid cars, fully electric vehicles which are:
New and unused: Qualify for 100% first-year allowances, so you can claim tax relief on the full value of the asset
Second hand: Only qualify for main rate 18% capital allowances
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 costs 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 way as any vehicle that you provide. If the vehicle is purchased using a hire purchase scheme, the total amount of the loan should be reported on the balance sheet, and it will reduce each year as repayments are made. The interest element of the repayments is accounted for as an expense in the profit and loss account.
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.
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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 online quote.
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About The Author
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.