A limited company contractor's guide to purchasing an electric car, tax-efficiently

There are now around 1 million electric cars registered in the UK, and electric car sales were up 17.1% in 2023.

As a director and employee of a limited company, there’s no reason why you can’t also join the revolution, writes Greg Timson, chief accountant at contractor accountancy firm inniAccounts. What’s more, there are tax-efficient ways of doing so thanks to the governments push to get more businesses to switch to electric. 

Better BIK rates for electric vehicles

Up until now, it’s always been viewed as more tax-efficient as a limited company director to buy your own petrol or diesel car privately and, when the car is used for business purposes, claim mileage through the business. 

The main reason for this is that petrol and diesel cars have a high ‘Benefit in Kind’ (BIK) charge attached to them and the corporation tax relief is quite restricted.

However, there are now better BIK rates for electric vehicles - 2% - so it makes sense to add them to your list of options when reviewing your next car purchase. 

So you’ve got an electric car in mind, what should you know? 

Let’s start with corporation tax.

If an electric car (not hybrid) is purchased outright or through a finance hire purchase agreement where ownership of the vehicle will pass to the company, you will be able to claim ‘first year’ capital allowances on the cost of the car.

The car must be brand new to qualify for first-year allowances. However, second-hand electric vehicles could still benefit from capital allowances albeit at reduced rates. 

What if you, as a limited company worker, wants an e-vehicle lease or hire purchase?

If you lease the e-car, you can include the monthly rentals in your profit and loss account as an expense, thereby reducing the company’s profit and corporation tax for the year.

In instances where the car is bought through hire purchase, not only will the company benefit from the 100% first-year allowance, but it’s also possible to make corporation tax savings on the interest on the monthly payments.

This means that the full cost of the car will be deducted from your company’s profits before corporation tax is calculated. Any costs associated with the car such as servicing and insurance can also be paid by the company and attract corporation tax relief.

Example

To help illustrate the above let’s take an example. If a car costs £40,000 brand new, it would reduce the company’s tax liability by 19% in the year of purchase (assuming tax is paid at the small profits rate). This equals £7,600. 

If the car is a used car, then the relief isn’t as generous, and it’s worth noting different rates apply to hybrid cars.

If you decide to sell or exchange the car, corporation tax would be payable on any disposal proceeds.

How the P11D benefit-in-kind applies is key on your electric car purchase

It’s important to understand how the P11D Benefit in Kind applies to an electric car purchase. 

If the car is available for personal use, then a BIK charge would apply, and National insurance and tax are due from the employer and/or the employee. This is calculated based on the official list price of the car and on the CO2 emissions and fuel type.

While the BIK charge for petrol/diesel emission vehicles can be high (37%), for electric cars it is much lower at 2%.

Going back to our example of a £40,000 car, we can calculate the BIK value paid by the employee in tax, and the National Insurance the company would pay, as follows: 

• The Benefit in Kind value, calculated at 2% of £40,000, is £800.

• A higher rate taxpayer would then pay 40% of this to HMRC each year i.e. £320 and the company would pay national insurance at 13.8% of this i.e. £110.

Contractors buying an e-car must consider VAT, aside to reclaims for charging

VAT is generally restricted on the purchase of cars. However, if the car is leased, the company can reclaim 50% of the VAT from the lease payments.

Of course, running an electric vehicle takes electricity, so charging points and mileage can also be claimed. 

Currently, a 100% cost deduction against the profits applies to a charging point. If the company pays for a vehicle charging point to be installed at the employee’s home, no Benefit in Kind will apply -- provided it is used to charge a company car. 

If the employee is using their own electricity to fuel the car, then expense reimbursement can be calculated using HMRC’s rate of 9p a mile for any business journey.

Further (final) benefits, includes the Workplace Charging Scheme Grant

Finally consider, there’s also a ‘Workplace Charging Scheme Grant’ for installing charging points at an office address.

Open to businesses, this scheme grant covers 75% (inc VAT) of the upfront costs of purchasing and installing charge points. It’s capped at £350 per socket and a maximum total of 40 sockets. 

So should purchasing an electric vehicle via a limited company be your next tax-efficient purchase? With the significant tax benefits available, it’s hard to not to give it some very serious consideration.