Should you buy an electric car through your business?

The company car was long seen as a staple part of any senior employee’s remuneration package and for an employee to receive the use of a new car with no upfront payment and manageable monthly tax deductions from their payslips it was usually very well received.

But as a business owner yourself, is a company car a tax efficient way of receiving the benefits of your hard work? Below are some quick questions that you should consider before buying a car.

Are electric cars worth it?

From a tax perspective, electric cars continue to offer significant advantages. As of the current tax year, the Benefit-in-Kind (BIK) rate for fully electric cars is 2%. However, starting from April 6, 2025, the BIK rate for zero-emission vehicles will increase by one percentage point each year, reaching 5% in the 2027/28 tax year. In contrast, non-electric cars typically have higher BIK rates, making electric vehicles more tax-efficient for employees.

What tax benefits can business owners receive when purchasing a company car?

Companies cannot reclaim VAT on the purchase of a car. However, they can deduct the cost of the vehicle against their profits for Corporation Tax purposes. For fully electric cars, businesses can currently deduct 100% of the cost in the year of purchase (this applies to only NEW fully electric cars). This is known as the First Year Allowance. For cars emitting over 50g/km of CO₂, the allowances are significantly reduced, leading to a longer period of time over which the tax can be deducted.

Does it make a difference if I lease the car rather than buying it outright?

Leasing a car allows businesses to recover 50% of the VAT charged on the lease payments. Additionally, the lease payments are deductible for Corporation Tax purposes in the year they are incurred. There is no change to any tax you might pay as an individual.

What about running costs/insurance/fuel etc?

When the company owns the car, it can cover all running costs, including insurance and maintenance, and reclaim any associated VAT. For fully electric cars, there is no additional tax charge for the company covering the cost of electricity used for charging. There may also be grants available for installing electric charging points. For petrol or diesel cars, if the company pays for fuel, there could be additional tax charges on the individual.

Additional Considerations:

Vehicle Exercise Duty (VED): Starting from April 1, 2025, zero-emission cars registered on or after this date will be subject to VED. The first-year rate will be £10, and from the second year onwards, the standard rate will apply, which is currently £165. Electric cars registered between April 2017 – 31 March 2025 will also pay the standard rate £195 annually. 

Expensive Car Supplement: Electric vehicles with a list price exceeding £40,000 will be subject to an additional rate of £355 per year for five years, starting from the second year of registration. This measure will also take effect from April 1, 2025.

This all sounds like a lot of hassle, can’t I just buy it myself and take the money out of the company?

You certainly can! You will pay dividend tax on the money withdrawn from the company and the company will not receive any tax relief but you will be able to recharge your business mileage to the company.

In conclusion, while electric vehicles continue to offer tax benefits, upcoming changes in tax regulations, particularly from April 2025, will impact the overall tax efficiency of owning an electric car through your business. It’s advisable to consult with a tax professional to assess the specific implications for your situation.

If you have further questions or want to discuss specific issues then please get in touch!