Find out why electric company cars could be the most tax efficient option.
Tax on company cars
If you drive a company car then you will face a tax on the value of this as it is treated as a benefit in kind. The higher the pollution of the car, the greater the charge.
From the 6th April 2020 until the 5th April 2021 the benefit in kind rules have changed for electric cars, and the benefit in kind charge is 0%.
This means that if you drive an electric company car during this period you will not pay tax on the benefit in kind.
This amount will increase to 1% from 6th April 2021, then 2% from April 2022, and 3% from April 2023. These are still along way below the current rates.
Also, as electric charging doesn’t count as road fuel, there is no fuel benefit charge, even when charging the car at the workplace.
Does this help the company?
The new rules also coincide with several rules that help the employer reduce their costs.
If the company chooses to hire the vehicle they will be able to claim 50% of the VAT on the contract hire costs, as well as 100% of the VAT on maintenance costs.
If the company chooses to buy the electric car, they can claim the full cost of the car against any tax liability.
Employers could use this to help retain staff. If an employee is looking for a new car then through a salary sacrifice scheme the employee could receive the car before tax and the employer could claim all the cost of the car.
Francesca is a higher rate tax payer looking at getting a new electric car. If the yearly cost is £5,800 she will have to pay that post tax.
This means that the £5,800 payment will cost Francesca and extra £200 in National insurance and £4,000 in income tax. This means that the £5,800 would actually cost her £10,000 of her salary.
If she makes a deal with her employer to take part in a salary sacrifice scheme where she forgoes the £5,800 cost, she will only be paying that amount pre-tax, and therefore saving £4,200 of gross salary.
This will save Francesca around £2,000 in tax and NI, and it will allow the company to claim all the cost of the car against profits, as well as helping staff retention.
Thanks to these changes it is now more tax efficient than ever to go electric.