Save tax when buying an electric car through your company

With the government encouraging the switch to electric cars, is now the right time to purchase one through your limited company?

Save tax when buying an electric car through your company

Whether to buy a car through a limited company is a question we are often asked. Historically, for petrol and diesel cars with a mix of personal and business use, it’s generally been more tax efficient to purchase the car personally and claim mileage at the HMRC approved rates for business trips.

The main reason for this is that petrol and diesel cars have a high benefit in kind charge attached to them and the Corporation Tax relief is quite restricted.

However, in its push to get more businesses to switch to electric, the government offers far more generous tax breaks for companies that buy an electric car.

Corporation Tax

If an electric car is purchased outright or through a finance lease agreement, where ownership of the vehicle will pass to the company, you will be able to claim Capital Allowances on the cost of the car.

This means that the full cost of the car will be deducted from your company’s profits before Corporation Tax is calculated.

As an example, if a car costs £40,000 it would reduce the company’s tax liability by 19% (assuming tax is paid at the small profits rate) of this i.e. £7,600 in the year of purchase

The car needs to be purchased as brand new to qualify for these rates. If it’s purchased used, the relief isn’t as generous. It’s worth making sure the car you are looking at is fully electric as different rates also apply to hybrid cars.

Any costs associated with the car such as servicing and insurance can also be paid by the company and attract Corporation Tax relief.

It’s worth considering your longer term plans for the car as these can also impact on tax. When the car is sold or exchanged, Corporation Tax would be payable on any disposal proceeds.

P11D Benefit in Kind

If the car is available for personal use a benefit in kind charge would apply. This is calculated based on the official list price of the car and on the C02 emissions and fuel type.

Whilst the charge for high emission vehicles can be high, for electric cars they are much lower; 2% of the list price for the 2023/24 tax year and it’s planned to stay at low percentages for the next few years.

Continuing with the above example, if the list price of the car is £40,000 the benefit in kind value at 2% of this 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.

Charging points

Capital allowances can also be claimed on charging points. Currently they qualify for a 100% deduction of the cost against the profits.

If the company pays for a vehicle charging point to be installed at the employee’s home no benefit in kind will apply if it’s for use by the company car.

In addition, if the employee is using their own electricity to fuel the car the company can reimburse them at 9p a mile for any business journeys carried out.

If you are considering purchasing a company electric car please get in touch with us to discuss it further.