Going green has never been so tax efficient!
At NSG we promote all things green, and today we are talking electric cars.
Fully electric cars are starting to become a realistic option for most when looking to upgrade their current vehicle. Not only can you show off your green credentials by investing in a zero -emission motor, but with new schemes allowing you to buy through your employer, low benefit charges from HMRC, an exemption from road tax and the congestion charge, it is increasingly difficult to make a case against a fully electric car.
There are various schemes available in the market, but below we have identified two leasing options you could own an electric car via your employer/ own company.
Employer leases the car – the employer leases the car on behalf of the employee and will pay a charge based on the cars P11d value (details below). The company can offset the expense against corporation tax and potentially claim up to half of the VAT back. The employee gets to drive a brand-new electric car using part of their gross salary – making savings on income tax and national insurance. They will pay some company car tax (Benefit in Kind) but the rates for electric cars are extremely low until 2025.*
Employees – salary sacrifice – Employees can drive a brand-new electric car using part of your gross salary – making savings on income tax and national insurance. You will pay some company car tax (Benefit in Kind) but the rates for electric cars are extremely low until 2025.* You can save up to 40% on driving a brand-new electric car with maintenance, tyres, and more included, plus optional insurance.
*Benefit in kind (BiK) is the percentage charge applied to calculate an employee’s company car tax. It’s directly linked with a vehicle’s CO2 emissions. BiK for electric vehicles is 1% for 2021/22, rising to 2% until 2025. Petrol and diesel cars are taxed at higher BiK rates – up to 37%, so the saving is significant.
Understanding company car tax
Company-car tax applies to cars bought by employers for their employees’ private use. It was brought in to encourage both businesses and workers to choose low-emission vehicles, primarily by linking tax payments to CO2 emissions. However, company-car tax is not only based on the vehicle’s emissions, but also its list price and the salary of the employee using it.
How company-car tax and BiK rates work for electric cars
When an employee receives a vehicle for personal use from their employer, this is classed as a benefit, which is taxable. The more formal name is a Benefit-in-Kind (BiK). A list of company cars an employee can choose is provided by their company, and how much tax the company and the employee each pay depends on the vehicle’s value, its CO2 emissions, and the income-tax bracket of the employee.
Company-car tax in the UK is broken down into two parts: how much the company has to contribute and how much the employee using the car has to contribute. This applies to both electric and non-electric cars.
How much the company has to pay is determined by the car’s ‘P11D’ value – this is the value of the car including VAT, options, and the delivery fee – as well as its CO2 emissions. The company fills out a form each year and pays the fee to the Treasury.
How much the employee has to pay is more complicated. The BiK rate is determined by the BiK band the vehicle sits in, its P11D value, as well as your income-tax bracket. The following formula is used to calculate BiK tax: (P11D value) x (BiK band) x (income-tax bracket) = BiK tax
As an example, a fully electric car with a P11D value of £30,440 has a BiK for the financial year 2021/22 set at 1%. This means the BiK value for this car is £304, as the BiK value is calculated by multiplying the BiK band by the P11D value (30,440 x 0.01).
The next step is to work out how much tax you have to pay on the BiK value; this is done by multiplying it by your income-tax bracket. If you’re a 20% taxpayer, you’ll pay 20% of the BiK value, which equates to £61 per year. If you’re a 40% taxpayer, it’ll cost £122 annually. This is far lower than an employee would pay on standard car, and
What is the Benefit-in-Kind (BiK) rate for electric cars?
Using the above formula, the key to the overall BiK tax is the BiK band or BiK rate, expressed as a percentage. This percentage is determined by the Government. In short, the more polluting the vehicle, the higher its BiK rate is. For all fully electric cars on sale, the BiK rate is 1% during the 2021/22 financial year. It’ll rise to 2% for 2022/23, remaining there during 2023/24 and 2024/25.
What about plug-in hybrid cars?
Because BiK rates are determined by CO2 emissions, plug-in-hybrids are also subject to company-car tax in the UK. The amount of tax you pay depends on how far they can be driven with zero emissions. BiK rates for plug-in hybrid cars first registered on or after 6 April 2020 are between 1-14% depending on their electric range.
If you are interested in an electric car and want to know more, please get in touch. With BiK so low on fully electric cars for the next few years we think it’s worth considering.
