Property Developers, Property Investors, Doctors / GPs

Tax breaks on electric cars

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Simon Misiewicz

29th July 2021

The frequently asked questions about tax breaks on electric cars

As accountants, we are regularly asked about tax breaks on electric cars. We will look to answer the below questions in this Article.

“Are you paying too much tax on your electric car?”

“What are the basics of taxation on electric cars?”

“The UK government tax breaks on company cars”

“What is the Benefit In Kind (BiK) tax rate?”

“What is the Benefit In Kind (BiK) tax rate from April 2020 to 2025?

“Is it better to buy or lease an electric company car?”

“Can I claim capital allowances on an electric car?”

“Should I opt for Salary Sacrifice with an electric car?”

“Can I reclaim VAT on an electric car?”

“What are the tax benefits of buying an electric car?”

“What are the tax drawbacks of driving an electric car?”

“How does this affect our American readers?”

Are you paying too much tax on your electric car?

Our tax specialists help over 1,000 monthly retained UK clients to minimise tax whilst building their wealth.

There are many reasons why people pay far more tax on electric cars than they need to.

This is because:

– They do not know what they do not know.
– They have not spoken to a tax specialist to go through their situation to see what available tax reliefs are available to them.
– Their accountants or solicitors are not aware of the many reliefs available to their clients and are not taken advantage of.
– Tax legislation changes but either the person or their accountant/tax specialist have not been made aware.

What are the basics of taxation on electric cars?

As accountants serving thousands of property investors and business clients, we know that our clients’ priority is to pay less tax, increase their wealth, and find ways to make their investments work harder.

Some of the ways our tax accountants help clients save money are by being more tax-efficient within their business operations. This can include the use of additional items such as company cars.

Electric cars are a good example of how our clients can pay less tax, increase wealth, and make an investment work harder for them.

In 2020, more than 108,000 electric vehicles registered in the UK, an increase of 185% from the previous year.

Of the total number of vehicles registered in the UK in May 2021, electric cars formed 8.4% of the total.

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The UK government tax breaks on electric cars?

The UK government is pushing hard to adopt electric vehicles (EVs) as we move closer to a total ban on the sale of new petrol and diesel cars in 2030.

By reducing certain elements of taxation on electric cars, the Government is using the incentive of low tax bills to encourage company car drivers to choose an electric vehicle instead.

It seems unlikely that the Government will keep the tax bandings for electric vehicles at a low level. They will gradually climb to safeguard revenue that would otherwise be lost.

This makes the reasons to switch to an electric car sooner rather than later.

HMRC has provided details on how to calculate the tax rate on company cars which is worth reviewing.

Our YouTube presentation also provides everything you need to know about the taxation of company vehicles and how to be as tax-efficient as possible.

Have a question about property investments, tax or being an expat?

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What is the Benefit In Kind (BiK) tax rate?

Benefits in Kind (BiK) are benefits that employees gain from their employment but which are not included in salary. This can include a company car.

BiK tax is payable on a company car if it is also available for private use, such as travelling between home and work.

HMRC calculate that BiK is charged based on a cash-equivalent value of the benefit.

Employers submit a P11D Form that details any work-related taxable expenses and taxable benefits that have been received during the tax year.

BiK may be taxed under PAYE by being offset against personal tax allowances. If the Benefit in Kind is not included in your tax code for the tax year you receive them, the tax may be collected after the end of the tax year.

Company cars, including electric vehicles, will be categorised into a series of BiK bands based on a vehicle’s fuel or energy type and its CO2 rating.

What is the Benefit In Kind (BiK) tax rate from April 2020 to 2025?

From 06 April 2020, the BiK brackets were substantially revised, with the taxable figure for a zero-emissions electric vehicle dropping from 16% to 0%.

The taxable figure rises marginally from 1% in 2021 and 2% in 2022, while the Budget confirmed that the 2% rate would be maintained through to the 2024/25 tax year.

This provides company car tax certainty for drivers of electric vehicles as company cars.

The Government sets BiK tax rates to encourage employers and company car drivers to choose vehicles with lower CO2 emissions like pure electric cars or plug-in hybrids.

The Benefit in Kind tax band change was also changed retrospectively, meaning that company car drivers who took delivery of a fully electric company car before 06 April 2020 also benefit from the 0% change.

If you’d like to save tax on the BiK of your company car, please get in touch with one of our tax team.

Is it better to buy or lease an electric company car?

Vehicle leasing can mean different things, which can significantly impact the tax reliefs available.

Leasing a company car is essentially ‘renting’ it with the intention to hand it back in the future. This is classified as an operating lease.

This is different to Personal Contract Purchase (PCP).

If the car has emissions under 110g/km, you can get tax relief on all of the payments.

From April 2021, this threshold went down to 50g/km. Only cars with CO2 below this get full relief on monthly rental payments.

To discuss how you can make tax savings on your company vehicle lease payments, speak to us today.

Can I claim capital allowances on an electric car?

A further tax break on electric cars is that you can claim capital allowances for your business when you buy vehicles that are used in the business.

This enables you to offset the cost of an electric car purchased for your business from your profits before you pay tax.

For expenditure incurred before 01 April 2021, a 100% First Year Allowance (FYA) was available for a new electric car.

The government announced in the 2020 Budget that for expenditure incurred on or after 01 April 2021, the FYA will be restricted to new electrically propelled and zero-emission cars.

HMRC has provided clear information on claiming capital allowances on company cars to review.

Our specialist tax team can advise you on how to claim capital allowances on your electric car today.

Should I opt for Salary Sacrifice with an electric car?

Salary sacrifice enables you to exchange part of your salary for a non-cash benefit from your employer, such as a company car.  This is another example of where both your company and employee can benefit from the tax breaks on electric cars

Salary Sacrifice on fully electric vehicles is a cost-effective way of driving.

Once enlisted on a scheme with a suitable electric car, a single monthly payment covering leasing, maintenance and insurance is taken directly from an employee’s salary before income tax and National Insurance (NI) contributions.

This means that both the employee and employer save money, as the employee pays tax on a lesser portion of their salary. In contrast, the company pays fewer NI contributions while helping to support more zero-emissions driving.

Salary Sacrifice can be utilised regardless of an individual’s role or the size of a business.

To discuss how Salary Sacrifice can help you save tax, contact our tax team today.

Can I reclaim VAT on an electric car?

An electric car will still be viewed as a car for VAT purposes.

If there is any private use of the car, VAT is not recoverable on purchase.

The VAT can be reclaimed if the electric car is used 100% for business purposes, although this can be difficult to prove to HMRC.

A similar restriction also applies to leased company cars.

Where there is any private use of the car, only 50% of the VAT on the leasing charge can be claimed.

Full VAT recovery is available on ongoing maintenance of leased cars, subject to partial exemption and business use tests.

Vans and motorbikes are not classified as cars, so input VAT is claimable.

What are the tax benefits of buying an electric car?

Tax changes that came into effect in the 2020/21 tax year helped reduce car tax bills.

From 06 April, fully electric cars now pay no Company Car Tax (CCT) in 2020/21, 1% in 2021/22 and 2% in 2022/23.

The Government also introduced five new CCT bands for plug-in hybrid cars, which emit 1-50g of CO2/km, which further benefits electric vehicles that can drive furthest with zero tailpipe emissions.

Fully electric cars are exempt from paying Vehicle Excise Duty (VED)  which provides a tax saving incentive.

All cars that emit less than 75g/km CO2 pay less road tax in the first year.

Cars with CO2 emissions of less than 50g/km are eligible for 100% first-year capital allowances.

This means that with electric cars, you can deduct the full cost from pre-tax profits.

On an electric car costing £40,000, this could amount to tax relief of £7,600 in the first year.

Zero-emissions electric vehicles are a zero-rated standard tax for the first year and all subsequent years.

Road tax is not paid on a pure electric vehicle company car. Preferential BiK rates until at least 2025 make pure electric cars a strong option to consider when it comes to tax savings linked with company cars.

What are the tax drawbacks of driving an electric car?

Supply can be a problem for some electric car models.

An electric vehicle is much more expensive to lease than a petrol or diesel vehicle of a similar size, so the leasing repayments will also cost more on an ongoing basis.

If you don’t have somewhere at home to install a charging point, longer journeys can be difficult.

As well as the employee paying BiK tax on their car, the employer must also pay the employer’s National Insurance on the car’s BiK value which is currently set at 13.8%.

We have discussed tax issues with company cars in detail in a previous article for you to review.

How does this affect our American readers?

Purser Tax helps British people save tax in the US, and Americans save tax in the UK.

It is one thing to be tax-efficient in the UK or the US; it is another thing to be tax-efficient across the Atlantic.

This is why you need to get a tax advisor that truly understands international tax.

Tax breaks on electric cars

You may be interested in our article to explain how you might extract money out of a Limited Company.

We also wrote an article about the benefits in kind tax charges that applies to company cars.

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