How much tax can you expect to pay with an electric car?

How much tax can you expect to pay with an electric car?

By Published On: 7 December 2021Categories: Limited Company, Small Business Owner, Tax, VAT

Electric cars are no longer a thing of the future! And whilst we’re not quite at the teleporting stage, having an electric car is certainly becoming the car of choice, especially with the planned ban on petrol and diesel cars from 2030 onwards.

So what are your options when considering purchasing an electric car, and how much tax can you expect to pay? In this blog we explore all that, plus any attractive tax benefits that are associated with your green mode of transportation.

Company cars

If you’ve ever considering purchasing a car through your Limited Company before, the cost of doing so may have put you off. The increasing tax and perceived hassle with keeping a record of your outgoings may have seen more trouble than it’s worth. But with the recent changes to tax and the introduction of electric cars, if you’re considering changing your car, then your luck is in!

The rise of the electric car

Electric car popularity is set to rise, at a compound rate of 29% between now and 2030. Set to play one of the biggest roles in the government’s plans to meet their targets in reducing the UK’s carbon emissions, HMRC are giving a helping hand by reducing the Benefits in Kind (BiK) tax for electric cars to zero. The BiK rate will rise soon, but even with the planned increase, it’ll still offer a great deal for those looking to buy electric.

How will electric cars be taxed?

Car tax is currently split between what you as an employee of your Limited Company pays, and what your Limited Company pays. The amount of tax due is dependent on its actual value, the BiK tax, and the car’s emissions.

Depending on your current tax band, as an employee of your Limited Company you’ll need to pay income tax on this value. For example:

Basic rate tax band – you’ll pay 20%

Higher rate tax band – you’ll pay 40%

To calculate your employee tax, you’ll need to do the following calculation: (P11D value) x (BiK band) x (tax bracket). Your Vantage accountant will be able to calculate this for you.

Your Limited Company will need to also pay National Insurance Contributions (NICs) on your company car. BiK tax comes in various bands, and the higher your car’s Co2 emissions, the higher the band you’ll fall into. You’re able to see your car’s Co2 emissions and your tax band by visiting the website.

Before April 2020 the BiK for electric cars was 16%, so for example, if your car’s list price was £30,000, your BiK would be £4,800 (16% of £30,000). You’d then need to personally pay income tax on this amount, depending of course on which tax band you fall into (20% or 40%). Your Limited Company will also pay National Insurance on this via the P11D form (13.8% of the BiK).

Good news for electric car owners

April 2021 saw good news for those about to purchase an electric car, as the BiK dropped from 16% to 0%. It will rise to 1% in 2021/22, and then 2% in 2022/23. After this rise there are no further announcements, but the government has committed to releasing any planned BiK increases at least up to two years in advance, so as to allow people to properly plan, and to also provide certainty.

The tax on vans

If you use your van for both personal and professional use, you’ll be liable to pay a ‘van benefit charge’, which is currently £3,500. As with cars, you’ll need to also personally pay 20% (or 40% if you’re in the higher rate) of the BiK (£3,500) via your Self Assessment Tax return, and 13.8% via your company’s P11D.

What about hybrids?

A hybrid’s BiK will depend on the distance it can travel whilst remaining in its low electric mode, as well as it’s Co2 emissions. For example:

If your petrol hybrid can travel between 30 and 39 miles alone – you’ll pay a BiK at 11%

If your petrol hybrid can travel between 40 and 69 miles alone – you’ll pay a BiK at 7%

Even though the BIK rates are greater than pure electric models, it’s still substantially lower than the BiK rates (up to 37%) which you’d pay for a purely petrol or diesel car.

Which is best for you?

If you still feel like having the best of both a fuel and electric car is the right decision for you, then a hybrid might be the best option. Whilst we’re moving towards having electric plugs and points outside our homes, and plenty of charging points around the country, they’re still few and far between, so having the comfort of knowing you’ve also got a backup of fuel on-board may be the right option for you.

No doubt by 2030 when the ban comes into force charging points will be everywhere, along with batteries with much greater lives, but until then a selection of both might be best.

What other savings are there?

A low emissions car may also mean savings in Corporation Tax. For certain low emission cars there’s 100% first year allowance, which means you’re able to put the cost of the car’s purchase value towards reducing the profits from your Limited Company, and ultimately save on Corporation Tax. Should you lease rather than purchase, you’re also able to use the lease payments to offset your company’s profits, and therefore also reduce your company’s Corporation Tax liability.

What’s in the future for electric cars?

Whilst we can’t say for sure whether teleporting will be a reality by 2030 (and we can’t wait to see how HMRC would tax that mode of transportation!), we do know that the popularity for electric cars will only continue to grow, and as this blog has proven, be cheaper from a tax point of view.

How your Vantage accountant can help

With another 8/9 years to go until the ban comes into full force, there’s plenty of time for the technology to develop and electric to become the new norm. But if you’re considering purchasing a new car in the next year or so, be sure to run your decision past your Vantage accountant to know exactly how much you can expect to pay in tax, and whether going electric or hybrid could save you money based on your own personal circumstances. We look forward to helping you on the way to embracing greener travel and saving you money in the process.

Note: All the information and advice in this blog post was correct at the time of writing.

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