As a Limited Company owner, are you aware of the tax implications of an electric car for your business? In this blog, we’ll explore the differences between leasing, hire purchasing and outright purchasing an electric vehicle and the tax you can expect to pay.

The electric advantage

The government, in its effort to hit net zero emissions by 2050, has made electric cars a more affordable choice for businesses. For the 2024/25 tax year, the Benefit in Kind (BiK) for electric company cars is 2% and will increase each year by 1% until 2028, reaching a total of 5%. That increase may seem substantial, that is until you compare it to the BiK for petrol and diesel cars which can be as high as 37%.

Breaking down the costs

As an example, if a company buys an electric car with a list price of £31,140, with the 2024/25 rate being 2%, then the BiK amount due would be £622.80. This tax is then split between the employer and employee, with the amount the employee has to pay being based on their income tax bracket.

For instance, if the employee was a basic rate payer (20%) they would have to pay £124.56 per year. Similarly, those on the higher (40%) or additional rate (45%) would have to pay those percentages of the BiK.

The employer must also pay National Insurance Contributions (NICs). Currently, this is set at 13.8% of the car’s BiK value. So in our example, this would be £85.95, which is your Class 1A employers National Insurance, and this is payable by the company.  We recommend that you talk to your accountant about how these figures might affect your business, especially if you are concerned these figures could push you into a different tax rate. Electric cars can offer significant Corporation Tax savings.

Lease – Corporation Tax considerations

If the emissions are 50G/KG or less, 100% of the lease costs are allowable for Corporation Tax Relief. You’re also able to reclaim 50% of the VAT back from HMRC.

Let’s look at an example based on a four-year lease with a £1,000 deposit and £299 monthly payments:

Year 1:

Total cost: £1,000 deposit + 11 monthly payments of £299 = £4,289

Allowable Corporation Tax Relief: £4,289 x 100% = £4,289

Therefore, the Corporation Tax Relief would be anywhere from £814.91 (the minimum rate of 19%) up to £1,072.25 (the maximum rate of 25%) depending on the company’s profit.

Years 2-4 (each year):

Total cost: 12 monthly payments of £299 = £3,588

Allowable Corporation Tax Relief: £3,588 x 100% = £3,588

Corporation Tax Relief: £681.72 (19% rate) to £897 (25% rate)

Hire purchase – Corporation Tax considerations

With hire purchase, you can claim Capital Allowances as a ‘First Year Allowance 100%’ asset for brand-new or unused cars with 0G/KG CO2 emissions. Going back to the £31,140 car example:

Year 1:

£31,140 will be included as an asset for the company and shown on the Limited Company’s balance sheet. Then £31,140 x 19% = £5,916.60 of Corporation Tax Relief will be available in the first year of purchase. This relief could increase up to 27% depending on the company’s total profits in the year.

VAT implications

When leasing, you can reclaim only 50% of the VAT as HMRC will deem that you’re using the vehicle for both personal and business purposes. Keep in mind that the VAT reclaim only applies if you are on the standard VAT scheme – those on the Flat Rate scheme will not be able to reclaim VAT.

For hire purchase agreements, VAT is not reclaimable as per HMRC guidelines.

You’re able to put these costs through your Limited Company so long as the lease and vehicle are in the company’s name. You’d put these costs through your Limited Company and the leasing payments would be explained like so:

• Type = payment
• Category = leasing payment

If you’re purchasing the car via a hire purchase car agreement there is no reclaimable VAT as per HMRC’s guidelines.

P11d Filing

Your company will need to file a P11d annually.

How we can help

Considering an electric car? Your Vantage Accounting Client Director can provide a tailored illustration of the costs and tax implications to help you make an informed decision.

Have more questions on electric vehicles and the tax implications? Get in touch today to see how we can help you.