In recent years, electric cars have become increasingly common on our roads. Charging points are now a familiar sight in supermarket and office car parks, as well as private driveways. And with Government targets for all cars to be hybrid or electric by 2030 and 100% electric by 2035, it won’t be long until fuel-based vehicles become obsolete. So if you’re now thinking about switching to an electric car, how much can you expect to pay in tax?

In this blog, we look at the electric car tax rates vs. fuel, to help you decide if it’s worth the upgrade.

Company car tax changes

Owning a company car used to be seen as a useful benefit for those running their own Limited Company. However, the tax burden and perceived responsibilities linked to company car tax have led many to abandon this idea. Thankfully, HMRC has introduced recent tax changes that have made electric cars more accessible.

Electric car tax rates

In order to help the government achieve its net zero targets by 2050, a reduction has been made to the Benefits in Kind (BiK) tax rate for electric company cars. The rate has been set at 2% for the tax years 2023/24 and 2024/25, with annual increases of 1% in the following years. For instance, the rate will be 3% in 2025/26, 4% in 2026/27, and so on. While this gradual increase might appear substantial to some, it remains significantly lower than the 25% BiK rate applicable to petrol or diesel cars.

Currently, only 2% of the list price of your electric car will be subject to taxation for the next two financial years.

Calculating the Cost

The cost of company car tax is split between what your Limited Company pays and your personal contribution as an employee. For example, if you own an electric car valued at £40,000, the taxable amount (BiK) would be £800. The portion of that £800 you’d pay as an employee of your Limited Company depends on your income tax bracket. If you fall into the basic rate tax bracket of 20%, your annual payment would be 20% of £800, amounting to £160. A higher-rate taxpayer at 40% would therefore pay 40% of £800, which is £320 per year. It’s important to note that your Limited Company will also be required to pay National Insurance Contributions (NICs).

If you are unsure of what the cost of an electric car will be for you, reach out to your dedicated business accountant, who will be able to assist you.

Electric vs. Petrol: Does it Save Money?

We’ll now compare the costs of a petrol car and an electric car using the same £40,000 car example. In this case, let’s assume a higher income tax bracket of 40% and that the petrol car emits 130 grams per kilometre of carbon dioxide. This falls under the 31% BiK rate for the current financial year. So with 31% of £40,000 being £12,400, a 40% tax-bracket employee would need to pay £4,960 per year, or £413.33 per month in tax. Therefore in this example you’d be looking at an annual saving of over £4,500 per year if you went for an electric vehicle.

How Do Hybrids Compare?

Taxation for hybrids depends on their battery range and level of emissions. Conventional hybrids that can’t be charged via a plug generally have a limited electric range of less than a mile and emit over 50g per kilometre of CO2. The tax authorities consider these vehicles similar to petrol or diesel cars in their emission output and so you will be taxed similarly.

However, plug-in hybrids (PHEVs) generally emit less than 50g per kilometre of CO2. For these cars, the BiK rates are determined based on the distance they can travel using only battery power. Here are the BiK rates for PHEVs based on their battery range for the next three financial years:

• Less than 30 miles →14% BiK rate
• Between 30-39 miles → 12% BiK rate
• Between 40-69 miles → 8% BiK rate
• Between 70-129 miles → 5% BiK rate
• Over 130 miles → 2% BiK rate (treated as a 100% electric vehicle)

Choosing the Right Option for You

Figuring out whether you could benefit from an electric or a hybrid will depend on how many miles you will average and the availability of charging points. If you’re not confident you can rely solely on electric power, especially if there are very few charging points in your area, you might be better off with a hybrid for now. By 2030, the ban on petrol and diesel cars will take effect, and as charging infrastructure continues to expand in the coming years, you could consider transitioning to a fully electric car. For an illustration of how much tax you could expect to pay on an electric car, visit the gov.uk website and use their company car tax calculator.

Are There Any Other Savings?

Corporation Tax

Certain low-emission vehicles qualify for a 100% first-year allowance, allowing you to deduct the car’s purchase cost from your Limited Company’s profits and, as a result, reduce your Corporation Tax burden. If you opt to lease a car, the lease payments can also be used to offset your company’s profits, also reducing your Corporation Tax liability.

Road Tax

Currently, electric cars are exempt from road tax. However, from 2025 onwards, this will no longer be the case, and road tax will be the same amount for all car types.

Considering Your Financial Situation

Before deciding to purchase an electric or hybrid vehicle, why not get in touch with our team of expert accountants here at Vantage Accounting. They’re able to offer advice and support when it comes to tax matters that affect your business, and can help you make the right decisions financially both personally and professionally. Get in touch today to find out more.