Go Green and Minimise Your Tax Bill With Electric Company Cars (Buzzacott)

Business Opportunities
July 7, 2021 - Buzzacott

This is a thought leadership article from PrimeGlobal member firm Buzzacott on going green and minimising your tax bill with electric company cars.

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In the government’s push for a greener environment, generous tax incentives have been introduced to encourage employers and the self-employed to transition to electric and low emission vehicles. 

Benefit in Kind (BIK) tax

BIK tax is levied on employees who receive perks in addition to their salary as part of their remuneration package. The percentage of the list price of a company car that is taxed as a BIK, is determined by the CO2 emissions of the vehicle. 

In 2019/20 low emission cars (up to 50g/km) were taxed at 16% of the list price (20% for diesels). As electric cars tend to be more expensive than similar-sized petrol or diesel cars, there was little incentive for employers to provide electric-only company cars. However, from 6 April 2020 to the end of the 2020/21 tax year (5 April 2021), full battery electric vehicles (BEVs) paid a zero BIK rate, which also applied to hybrid vehicles with emissions from 1-50g per km that also have an electric mile range of 130 miles or more. This was a significant reduction – particularly for high-value electric cars, such as Tesla. 

Although we’re now in the 2021/22 tax year, you haven’t missed out completely as the BIK rate for both BEVs and low emission hybrids only increased to 1% from 6 April 2021. It’s due to increase to 2% in 2022/23, but will be frozen at 2% through to April 2025 - a rate which still offers substantial tax savings compared to petrol or diesel vehicles, which typically have a BIK rate between 18% and 37%. 

Fuel tax

BIK tax is also charged on employer-provided fuel for private use. As electric cars don’t use fuel, there’s no fuel benefit charge at all. Better still, employees using their own electric cars can utilise workplace charging stations without incurring a BIK tax charge, even where the vehicle is used for private use.

To illustrate, an employer provided petrol car in 2021/22, listed at £20,000 with CO2 emissions of (say) 120g/km, would attract BIK tax of £5,600 and a fuel benefit charge of £6,888. An electric car with the same value would attract BIK tax of only £200, and no fuel benefit. A significant difference! 

What if you’re self-employed?

The tax favourable incentives of low emission cars have been in place for self-employed individuals for some years now. Currently, 100% first year allowances (FYAs) are available on brand new low emission vehicles (of less than 50g CO2/km) purchased for business purposes, which effectively reduces your taxable profits by the cost of the car. Any vehicles purchased after 5 April 2021 must produce zero emissions to attract the 100% FYA. Otherwise, relief is given at 18% for CO2 emissions between 1 – 50g/km and at 6% for emissions above this limit.

Why make the change now?

The decision to transition to electric cars is no longer just a matter of social responsibility. In the current circumstances, the demand to keep a social distance while travelling presents a timely argument to switch to low emission cars and avoid public transport, as we look to return to our usual business lives in the coming months. If you’re not ready just yet, you’ve got until 5 April 2022 to consider your options before any further BIK tax increase.

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