Tax benefits of electric and hybrid cars

Now that there is a much wider choice of ultra low emission cars perhaps now is the time to consider the tax benefits of electric and hybrid cars particularly if you're a business owner.

Tax benefits of electric and hybrid cars

Tax benefits of electric and hybrid cars - definition for tax

There are currently three types of car in the UK that require some form of electric propulsion and would potentially be classed as 'ultra low emission' (see below).

  • ‘Pure-electric’ cars – ‘plug-in’ cars with electric propulsion systems only and no petrol or diesel engine. The Tesla is probably the most well known example.
  • Hybrid cars –  These are cars which combine a conventional petrol or diesel engine with an electric propulsion system.  These fall in to two sub categories.  There are either Plug-in’ hybrids that can be recharged by plugging into an external source of electricity. Alternatively, the are the more standard hybrid that cannot be recharged by plugging into an external electricity source. In this case, the electric battery is recharged by the engine or through regenerative braking.

For tax purposes an ultra low emission car is defined as one whose CO2 emissions are 50g/km or less. This might include all Pure-electric cars and some Plug-in and Conventional hybrid cars. 

Tax benefits of electric and hybrid cars - salary sacrifice

Whilst new rules were introduced by HM Revenue from 6 April 2017 to counteract perceived abuse of salary sacrifice arrangements it still possible to take advantage of these rules where salary is sacrificed for an ultra low emission car (see above).

The potential savings can be quite significant where salary is sacrificed for an electric company car as you can see from this example below.

Example

Tom is a director of Hardy Ltd on a salary of £100,000 and decides to swap £25,000 for the use of a new electric company car with zero CO2 emissions which costs £55,000 

Without sacrifice (£)

With sacrifice (£)

Salary

Car benefit - cash equivalent*


Tom's position

Income tax

National Insurance

Total

Tom's saving


Hardy Ltd's position

Employer's National Insurance

National Insurance on car benefit

Total

Hardy Ltd's saving

*Calculated as 13% of purchase price

100,000

-



28,360

  5,624

33,984



12,637


12,637



75,000

  7,150



21,220

    5,124  

  26,344 

   7,640



   9,187

      987

   10,174  

    2,463

Because of the tax benefits of electric and hybrid cars this means Tom and the company can potentially save  tax and National Insurance of £10,103 overall.

The tax rules for ultra low emission company cars are set to change from 6 April 2020 making the purchase of an electric vehicle potentially more attractive for a business.

Tax benefits of electric and hybrid cars - workplace charging points

The Autumn Budget 2017 indicated that, from 6 April 2018, there would be no benefit in kind charge on electricity that employers provide to charge employees’ personally owned electric vehicles.  Draft legislation for this exemption was published in July 2018, which can be found together with a policy paper and explanatory note here

Your company can also claim a tax deduction for the cost of installing a charging point. However this tax break is available for a limited period and expires on 31 March 2019 for companies and 5th April 2019 for sole traders and partnerships. 

It may also be possible for your company to claim a tax deduction for the cost of installing an electric charging point at your home without a taxable benefit in kind arising.

Electric and Hybrid cars - mileage allowances

If your company pays you a mileage allowance for using a hybrid car the position remains unchanged from our previous blog here.

The lack of advisory fuel rates previously meant that the situation for reimbursing employees for business mileage travelled in an electric car more complicated. 

However HM Revenue announced that from 1 September 2018, a new advisory fuel rate (even though electricity is not classed as 'fuel') of 4 pence per mile will apply for fully electric company cars. 

This new rate means that HM Revenue will now accept that payments to employees of up to 4 pence per mile for business travel in a fully electric company car will not result in a taxable benefit in kind. 

Your company can choose to use a different rate if, for example, you cars are more efficient, or you can prove that the cost of business travel is higher. However, if you pay an amount which is more than 4 pence per mile and you cannot demonstrate a higher electricity cost per mile, any excess will be taxed as a benefit in kind.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at richard@tfaaccountants.co.uk.

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