Why electric cars are tax efficient

by Michael Blaken

Published on 7th September 2023

If you run an owner managed business, one tax efficient benefit to consider is buying an electric company car.

tax benefits of electric cars

In the past, company cars were regarded as expensive for tax purposes and not the best use of funds. However, in April 2020 lower rates were introduced to encourage the uptake of electric cars, and since then, more and more business owners have done so.

Here’s why:

If you purchase an electric car outright, say for £30k, this will attract capital allowances and reduce your taxable profit by £30,000 (in tax terms, that is a saving of £5,700). ‘Normal’ cars do not get the same tax treatment. For personal tax, as there are no emissions, the cash equivalent value based on the list price is 2%, or £600. This means you pay £120 tax (for a basic rate tax payer) or £240 (higher rate) per year on having a company car.

So, if you buy an electric company car, the personal cost to you is only £120 (or £240) tax. Not only that, the £30,000 value is taken off company profits, pre-corporation tax, saving the business between £5,700 and £7,500, depending on the level of profits generated.

By contrast, on a £30,000 diesel car, depending on the emissions, your cash equivalent based on the list price could be around 27%, or £8,100. This means you would pay £1,620 in basic rate tax (£3,240 higher rate). The company will also have to pay £1,117 in Class 1A National Insurance.

Most business owners look to see how they can increase the money in their back pocket. If you are currently taking dividends to cover the monthly lease costs of a non-environmentally friendly car, you are having to pay tax on these dividends making the car that bit more expensive. By taking on an electric company car, the company pays for these costs, freeing you of the personal car lease costs.

What if you have already paid for your personal car? You can still benefit. Second hand car values are strong and therefore you could consider selling it.

The Government has pledged to fix the rates to April 2025, and they are likely to change thereafter, so if you are tempted to get an electric company car, now is the time.

For more help and advice on tax planning and tax efficient benefits for your owner managed business, get in touch with Optimum’s Accounts Director, Michael Blaken. Email mblaken@nulloptps.co.uk. We help businesses across Swindon, Wiltshire, Cheltenham and Gloucestershire. You can contact us here.

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