Electric Company Car tax – What are the benefits?

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Electric company car tax relief

Introduction to electric company car tax

The landscape of the automobile industry is rapidly evolving, with electric cars becoming more prevalent on our roads. Not only are electric vehicles (EVs) a sustainable choice for transportation, but they also offer numerous tax benefits in the UK. In this comprehensive guide, we will explore how both employees and limited companies can leverage UK tax relief on electric cars to their advantage. We’ll delve into the intricacies of tax relief for electric cars, including the benefits for employees, limited companies, VAT recovery, and leasing options. So, fasten your seatbelts as we embark on this journey to explore the world of electric car tax relief in the UK.

Employees and Electric cars: A tax-saving Duo

If you’re an employee and your company purchases an electric car for business use, you’re in for a tax-saving treat. The UK tax system encourages the use of electric cars by offering favourable terms for both employers and employees.

Income Tax and National Insurance Benefits

When a limited company purchases an electric car, an employee can use the vehicle for both business and personal purposes. The beauty of this arrangement is that employees only need to pay income tax and national insurance on a small portion of the car’s value. The portion subject to taxation is known as the “Benefit in Kind” (BiK). The rate of BiK depends on the car’s CO2 emissions and its electric-only range, and it can be as low as 0% for fully electric cars. This means that for many electric cars, employees may pay little to no tax on their personal use of the vehicle.

This setup is a win-win situation for limited companies and their employees. The company benefits from purchasing an environmentally friendly car and potentially saving on operating costs, while employees enjoy the perk of driving a company car with minimal tax implications.

Capital Allowances for Limited Companies

For limited companies, the advantages of investing in electric cars extend beyond the company car tax benefits for employees. Companies can claim capital allowances on the value of electric cars. What sets electric cars apart in this regard is that they qualify for the “First year Allowance” scheme, allowing companies to claim 100% of the car’s value in the year of purchase, even if it is on a finance agreement. This substantial tax relief encourages businesses to make environmentally conscious choices while reducing their tax liabilities.

VAT Recovery and Electric Cars

VAT recovery is a crucial aspect of tax relief when it comes to electric cars in the UK. Businesses can potentially recover a significant portion of the Value Added Tax (VAT) associated with electric vehicle purchases and usage. However, the extent of VAT recovery depends on the nature of the vehicle’s use.

Business-Only Use for VAT Recovery

To fully reclaim the VAT on the car’s purchase, it must be used exclusively and continuously for business purposes. If the vehicle is predominantly for personal use or has any mixed usage, the VAT recovery will be limited, if at all. Companies must carefully consider the allocation of their electric cars to ensure maximum VAT recovery.

Partial VAT Recovery for Leased Cars

In the case of leased electric cars, businesses can recover up to 50% of the VAT on the monthly lease price. This option offers flexibility for companies that may not meet the strict criteria for full VAT recovery but still want to enjoy some tax relief. As the tax rules are liable to change in the future, this would be a good option to safeguard yourself from any reforms to the current tax incentives.

Lease an Electric Car for Tax Benefits

Leasing an electric car presents yet another opportunity for businesses to reduce their tax liability while enjoying the benefits of electric mobility. Here is where it would be best to speak with an accountant to see the best option for you and your business.

Reduce Corporation Tax

Companies can utilize the monthly lease payments of electric cars to reduce their corporation tax. Leasing payments are considered a tax-deductible expense, which effectively lowers the company’s taxable profits. This can lead to a substantial reduction in the overall tax burden, making electric car leasing a financially advantageous choice for businesses.

Claim Up to 50% VAT

As mentioned earlier, businesses can also claim up to 50% of the VAT associated with the monthly lease payments. This dual benefit of reducing corporation tax and reclaiming a portion of the VAT makes electric car leasing an attractive option for businesses looking to enhance their environmental credentials while optimizing their tax position.

Annual Tax Implications for Employees

While the company car tax benefits of electric cars are undeniably enticing for both employees and companies, it’s important to note that employees may have to pay a small portion of income tax and Class 1A National Insurance on the BiK value of the car each year. This is a consideration worth factoring in, especially for those contemplating a switch to an electric company car.

The Ideal Choice for Small Limited Companies

The opportunities presented by the UK tax relief system on electric cars are particularly advantageous for small limited companies. If you’re a director seeking a new company car, opting for an electric vehicle could be a savvy move. The company car tax savings and environmental benefits align with the current trends in sustainability and responsible corporate practices.

In the ever-changing landscape of the automobile industry, electric cars have emerged as a beacon of sustainability and financial opportunity. The UK tax relief system for electric cars provides a compelling case for both employees and limited companies to consider the switch to electric vehicles. With income tax and National Insurance benefits for employees, Enhanced Capital Allowances for businesses, VAT recovery options, and the allure of reduced corporation tax through leasing, electric cars are becoming a smart choice that harmonizes fiscal responsibility and environmental consciousness.

As the world of business evolves, embracing electric cars is not only a step towards a greener future but also a strategic move to optimize tax relief and financial advantages in the UK. The road to tax savings is electric, and the journey begins with choosing an electric car that aligns with your business needs. So, why wait? Explore the world of electric cars and unlock the full spectrum of tax benefits that come with them.