Why choose an electric company car
Despite the potentially high personal tax charge, many employees still enjoy and prefer the convenience of being offered the use of a company car by their employer.
Those employers familiar with the benefit-in-kind tax rules will be aware the tax impact on the employee is much lower for those that choose lower-emission cars.
On 6 April 2020, new benefit-in-kind percentage bands were introduced which took into account very low-emission cars and electric cars, favouring full electric cars more. With more options on the market and with better infrastructure, they are now a much more viable option for an employer looking to provide an employee with a tax-efficient company car.
The past few years have also seen a significant increase in awareness of climate change among the general public and how individuals’ choices can contribute to a greener future.
Employers that provide employees with company cars have been recognising that changing their fleet to low or zero-emissions vehicles can help contribute towards this common goal and be an attractive option to their staff from a personal perspective.
There are also many financial reasons why both the employer and employee might wish to make the switch.
When assessing whether a company-provided electric car is tax-efficient, we need to consider this from both the employer and employee perspective.
When providing a company car to an employee, a tax charge is assessed on the individual based on the benefit-in-kind and this is subject to income tax at the employee’s marginal rate. The employer will also be assessed on Class 1A National Insurance contributions (NICs) at 13.8% on the benefit-in-kind’s value.
Therefore, both parties have an interest in the assessed benefit-in-kind being as low as possible. The lower the car emission, the lower the benefit-in-kind.
When we calculate the benefit-in-kind, we apply a percentage to the cars original list price based on the car’s CO2 emissions in grams per kilometre (g/km).
Another major advantage of buying new and unused electric cars is that 100% capital allowances are given on the purchase price. Other cars only get capital allowances of 18%/6% per annum.
It is also worth noting that there is no taxable fuel benefit charge for fully electric cars where the company provides electricity for business and personal use.
Tom’s a higher-rate (40%) taxpayer who has a company car with a list price of £40,000 which will be available to him for the whole of 2021/22.
The CO2 emissions are 198g/km so the relevant benefit-in-kind percentage is the maximum of 37%. He will be assessed on a benefit-in-kind charge of £14,800 resulting in a tax liability of £5,920 for the year. The employer will have a Class 1A NICs liability of £2,042.40, based on 13.8% of £14,800.
If Tom’s car was fully electric with zero emissions, the relevant percentage to apply to the value of £40,000 is now just 1% resulting in a benefit-in-kind charge of £400. At 40%, his tax charge for 2021/22 would be just £160 and the cost to his employer for Class 1A NICs is £55.20.
From a tax perspective, there is a clear financial incentive to both employer and employee to opt for an electric car. But this is just one way that taking this option could save both money.
As part of its push to encourage the switch to electric, the Government intends to provide more than £532 million for consumer incentives for ultra-low emission vehicles. Around £403m of this is earmarked for the extension of the plug-in car grant (PICG) to 2022/23.
From 12 March 2020, those making the switch to electric cars were eligible to apply for a grant of up to £3,000 towards the purchase of a new electric car.
In order to maximise the number of consumers who can benefit from this grant as the uptake increases, the Government reduced the available PICG and capped the value of cars on which it could be claimed. Currently, the PICG grant stands at £2,500 and cars costing more than £35,000 are excluded.
For further information on Electric Company Cars, please contact Joe Wilson on 023 8046 1237.