Why electric cars are so good for income tax, corporation tax and national insurance
How a company car works
A company car is a car that is purchased by a limited liability company and made available for private use by an employee and/or a director.
If the usage is not incidental to a business trip, then a company car exists. HMRC will require the company to declare the availability of the company car on a P11D.
From the company perspective
When a car is purchased by a limited liability company, the company is entitled to offset the purchase for corporation tax purposes via a claim for capital allowances. Depending on the CO2 emissions of the car, it depends on how quickly the company benefits; the higher the CO2, the lower the benefit is realised.
The company does not have to reduce the corporation tax benefit if the car is used for the employee’s personal use.
The company does have to pay a national insurance charge for making the car available for private use by an employee, and the company car must be reported on a P11D and P11D(B) by the 6th of July following each income tax year.
An electric car with zero CO2 emissions costing £50,000 will be eligible for a corporation tax write-off in year 1.
Therefore, a £50,000 electric car would save £12,500 in year 1 corporation tax, assuming the rate is 25%.
A Mini Cooper S Classic with CO2 emissions of 133 g/km would only be entitled to 6% of the purchase price in year 1, assuming it also cost £50,000; the Mini would save the following in years one through three.
|Year 1||Year 2||Year 3|
As you can see, there is £11,750 in additional corporation tax year 1 with an electric vehicle over a Mini.
The company does have to pay a national insurance charge for making the car available for private use to an employee;, this national insurance charge is also a deduction for corporation tax.
The electric charge would have a net amount of corporation tax amount due of £103, while the petrol car would cost the company £1604.
From the director/employee perspective
When a car that is owned by a company if an individual is allowed to use the car for private use, then the car becomes a benefit in kind for tax purposes. The charge depends on the CO2 emissions of the car and the original list price of the car.
If we consider a higher rate taxpayer using an electric car vs a petrol car both costing £50,000 and the petrol car with emissions of 133Co2.
The Electric Car.
Using the 22/23 benefit in kind rates an electric car has a percentage of 2%.
Therefore, the additional income tax payable by an individual with an electric £50,000 car is £400 pounds.
133CO2 Petrol Car
The benefit in kind rate for an individual with the above petrol car is 31%.
Therefore, the additional income tax payable by an individual with an electric £50,000 car is £6,200 pounds.
If you consider that a higher rate taxpayer buying a £50,000 car. They would need to drawdown a dividend of £75,471 and pay income tax of £25,471, to be left with the £50,000 after income tax.
It would only take just over 4 years before the individual had paid more income tax to use the vehicle from their Ltd company than they would to pay income tax on a dividend large enough to purchase the vehicle in their personal name.
Chippendale and Clarks general advice is that electric and sometimes cars with CO2 emissions under 50 grams per kilo should be considered as company cars.
If petrol cars are to be used for business use, we recommend purchasing personally and then claiming 45 pence per mile to be driven for any business use.
If the business involves many miles being driven a business only car provided by the company can be the answer, but strict rules must be followed in order to demonstrate to HMRC that it’s not available for private use. Professional guidance must be sought in this situation.
Second hand cars still use the list price of the vehicle for the benefit in kind calculation, HMRC do not allow you to use the second-hand purchase price.
Funding of vehicles
Disclaimer: Chippendale is not registered with the FCA to give financial advice and cannot recommend products or give advice. This article is intended to be viewed as general commercial and tax advice. Should you need financial advice into what products are right for you C&C will happily point you to an authorised FCA company.
The next question that is asked after an enquiry into a company car is now should a business fund this new car.
There is a lot of incorrect advice in this area, I hear clients and friends profess the tax benefits of finance arrangements. I will look to set the record straight.
The first question is should I buy using finance:
Finance is a loan with an interest charge. The interest charge on these loans can be as such as 15%. When you pay interest, this is essentially an additional cost to the vehicle, by using finance you are going to cost yourself more in the long run.
My advice to the finance question is does your company have spare cash or is cash flow an issue. If cash flow is an issue a financial product could be suited to your needs. If your company has spare cash that is not being used (always consider pension contributions) then a finance product would cost, you interest where you have no need to incur that cost.
There are two types of finance,
The first type of finance you own the car at the end personal contract purchase (PCP) and Hire Purchase (HP).
This is the type of finance we recommend for tax purposes; this type of product allows the claim of capital allowances.
The second type is a lease, where the company returns the vehicle at the end of the lease. With this product the company doesn’t claim capital allowances and is allowed a tax deduction of the payments in each year effectively.
Finance is a good tool for improving cash flow, but please take independent advice. But for tax purposes C&C prefer it when the vehicle is owned at the end of the financial product.
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