Corporate Tax Savings For Electric Vehicles
Key Insights
UK businesses can claim 100% First Year Allowances on new electric vehicles, allowing the entire purchase cost to be deducted from taxable profits in the year of acquisition—significantly reducing corporation tax liability compared to the 18% Writing Down Allowance for petrol/diesel vehicles.
Electric company cars benefit from a substantially lower Benefit-in-Kind (BiK) rate of just 2% until 2025 (rising by 1% annually to 5% by 2027/28), compared to up to 37% for petrol/diesel vehicles, creating significant tax savings for both employers and employees.
Salary sacrifice schemes for electric vehicles offer dual tax advantages, with employees saving on income tax and National Insurance while employers reduce their NI contributions—all while being exempt from Optional Remuneration Arrangement (OpRA) rules that would otherwise limit these benefits.
Electric vehicle salary sacrifice scheme offer businesses a rare opportunity: a chance to make environmentally responsible choices while also enjoying significant tax benefits. The UK government has introduced substantial tax incentives that make EVs increasingly cost-effective for companies of all sizes.
With advantages including 100% first-year capital allowances, minimal benefit-in-kind taxation, and reduced National Insurance contributions through salary sacrifice schemes, the financial case for electric vehicles is compelling. These incentives can substantially reduce the total cost of ownership compared to traditional petrol or diesel alternatives.
This guide will show the ways to maximise these tax advantages, whether you're considering your first electric company car or implementing a complete fleet electrification strategy.
Understanding The Basics
The UK government has introduced numerous tax incentives to encourage businesses to adopt electric vehicles as part of the country's journey towards net-zero emissions. Before looking into the specific tax benefits, it's important to understand what qualifies as an electric vehicle for tax purposes.
What Qualifies as an Electric Vehicle for Tax Purposes?
Zero-emission vehicles (ZEVs) are fully electric vehicles that produce no tailpipe emissions. Examples include the Tesla Model 3, Kia EV9, and BMW i4.
Ultra-low emission vehicles (ULEVs) are vehicles that emit less than 75g of CO2 per kilometre driven. This category includes most plug-in hybrid electric vehicles (PHEVs).
CO2 emission thresholds: The government uses CO2 emission thresholds to determine eligibility for many tax benefits. The most generous incentives are typically available for vehicles with zero emissions.
Different Ways To Acquire Electric Vehicles
There are several ways a business can acquire electric vehicles, each with different tax implications:
Direct purchase: Buying the vehicle outright as a company asset.
Leasing: Entering into a contract to use the vehicle for a set period, with the leasing company retaining ownership.
Salary sacrifice schemes: Allowing employees to exchange part of their pre-tax salary for an electric vehicle, which can lead to significant tax savings for both employer and employee.
Corporation Tax Relief For Electric Cars
When it comes to corporation tax, electric vehicles offer several key benefits for UK businesses. Companies can claim 100% First Year Allowances on new electric cars, allowing the entire purchase cost to be deducted from taxable profits. For leased electric vehicles, the lease payments can be deducted in full against corporation tax. These incentives can substantially reduce your company's tax liability while supporting the transition to cleaner transport.
100% First Year Allowances (FYA)
Perhaps the most significant tax incentive for businesses is the 100% First Year Allowance (FYA) for zero-emission vehicles. This allows companies to deduct the full cost of purchasing an electric vehicle from their taxable profits in the year of purchase.
Eligibility Criteria
The vehicle must be a zero-emission vehicle (fully electric),
Equipment for electric vehicle charging points,
Plant and machinery for gas refuelling stations,
Plant and machinery for use in a special tax site in the UK Freeports or Investment Zones.
How To Calculate The Tax Savings
The tax saving is calculated by multiplying the cost of the vehicle by your corporation tax rate (currently 25% for companies with profits over £250,000, or 19% for companies with profits under £50,000).
If you do not claim all the 100% first-year allowances you’re entitled to, you can claim the part of the cost you have not claimed using the writing-down allowances.
Corporation Tax Relief On Maintenance & Running Costs
In addition to the capital cost, businesses can also claim tax relief on the maintenance and running costs of electric vehicles used for business purposes:
Insurance: Fully deductible as a business expense,
Servicing and maintenance: Fully deductible as a business expense,
Charging costs: Fully deductible as a business expense,
Road tax: Fully deductible (though currently £0 for electric vehicles).
Comparison With Traditional Fuel Vehicles
When comparing the tax treatment of electric vehicles with traditional petrol or diesel vehicles, the benefits become even clearer:
| Aspect | EVs | Petrol/Diesel Vehicles |
|---|---|---|
| Capital Allowances | 100% First Year Allowances | 18% Writing Down Allowance per year |
| Emission-based Charges | Exempt from most | Subject to Clean Air Zone Charges, higher road tax |
| Benefit-in-Kind Rate | 2% until 2028 | 20-40% based on C02 emissions |
| Fuel Benefit Charge | No equivalent for electricity | Additional taxable benefit for employer-provided fuel |
Electric Car Through Limited Companies
Buying Electric Cars Through Your Limited Company
Purchasing an electric car through your limited company involves several steps:
Decision-making: Evaluate business needs and select an appropriate electric vehicle.
Purchase: The company purchases the vehicle and registers it in the company name.
Documentation: Keep all purchase documents for accounting and tax purposes.
Tax treatment: The company claims the 100% First Year Allowance on its corporation tax return.
Documentation Requirements
To properly account for a company's electric vehicle purchase, maintain these documents:
Purchase invoice: Must be addressed to the company with full business details.
V5C registration document: Should show the company as the registered keeper.
Detailed usage log: Record business vs personal mileage if there's mixed use.
Charging costs: Keep receipts for all charging expenses.
Insurance documentation: The Policy should be in the company's name.
Maintenance records: All servicing and repair invoices.
Best Practices
Conduct a thorough cost-benefit analysis before purchasing to make sure an EV is suitable for your business needs
Consider vehicle depreciation when looking at and planning long-term business finances.
Implement a clear policy regarding the personal use of company vehicles.
Evaluate alternative financing options like leasing or salary sacrifice, which may offer better financial outcomes.
Speak with your accountant about the specific tax implications for your business.
Plan for charging infrastructure at business premises if appropriate.
Review insurance options carefully, as premiums for electric vehicles can differ from conventional vehicles.
Leasing Options And Their Tax Implications
Leasing an electric car can be an attractive alternative to purchasing, particularly for businesses that prefer to avoid large capital expenditure.
Operating Leases vs. Finance Leases
Operating Lease: This is essentially a rental agreement where the company never owns the vehicle. Lease payments are fully deductible as a business expense.
Finance Lease: This is closer to a purchase agreement, where the company takes on most of the risks and rewards of ownership, but legally, the leasing company remains the owner. The accounting treatment is similar to ownership, but lease payments are still tax-deductible.
VAT Recovery On Leased EVs
VAT-registered businesses can typically recover 50% of the VAT on lease payments for cars, regardless of whether they are electric or conventional. If the vehicle is used exclusively for business purposes (with no private use), 100% of the VAT can be reclaimed.
Corporation Tax Relief on Lease Payments
Lease payments for electric vehicles used for business purposes are fully deductible against corporation tax.
Hire Purchase Agreements
A Hire Purchase (HP) Agreement is a credit agreement where you ‘hire’ an item, like a car or appliance, and pay for it in installments. This allows a company to spread the cost of purchasing an electric vehicle while still claiming the tax benefits of ownership.
Tax Treatment
For tax purposes, HP agreements are generally treated as if the company had purchased the vehicle outright. This means:
The company can claim the 100% First Year Allowance on the full purchase price (excluding interest),
Interest payments are tax-deductible as a finance cost,
The interest portion of each payment is fully tax-deductible as a finance cost.
For tax purposes, the company is treated as the owner from the start of the agreement.
Benefits Compared to Outright Purchase
HP offers several advantages over direct purchasing:
Cash flow management: Preserves working capital by spreading payments over time.
Immediate tax benefits: Still eligible for the same capital allowances as outright purchase.
Budgeting certainty: Fixed monthly payments help with financial planning.
Asset ownership: Unlike leasing, you'll own the vehicle at the end of the term.
No mileage restrictions: Unlike many lease agreements, HP typically has no mileage limitations.
Flexible deposit: Initial payments can often be tailored to your financial situation.
Interest Deductibility
Understanding interest deductibility on a Hire Purchase agreement is important because of the following:
The interest component of each payment is fully tax-deductible as a business finance cost.
This is treated separately from the capital allowances claim on the vehicle itself.
Interest must be properly identified and recorded in your accounts.
The effective interest rate method is typically used for accounting purposes.
Interest charges are shown separately on HP agreements, making them easy to identify.
Unlike some other forms of business interest, there are currently no specific restrictions on the deductibility of HP interest for electric vehicles.
VAT Considerations
VAT considerations for EVs can be significant and can offer advantages for any business. From being able to reclaim 50% of the VAT on leased electric cars to being able to recover VAT on charging infrastructures. Let’s get into the nitty gritty.
VAT Recovery Rules for Electric Vehicles
The VAT recovery rules for electric vehicles follow the same principles as those for conventional vehicles:
Outright purchase: VAT can only be reclaimed if the vehicle is used exclusively for business purposes, with no private use.
Leased vehicles: 50% of the VAT can be reclaimed, even if there is some private use.
Commercial vehicles: 100% of the VAT can be reclaimed (this includes certain electric vans and taxis).
VAT on Charging Costs
The VAT treatment of charging costs depends on the location and purpose of the charging:
Business premises: 100% of the VAT can be reclaimed on electricity used to charge vehicles for business purposes.
Home charging: If an employee charges a company car at home, the business can reclaim the VAT if the employee provides appropriate evidence of the cost.
Public charging networks: 100% of the VAT can be reclaimed on charging costs for business purposes, provided there is a valid VAT receipt.
VAT on Installation of Charging Infrastructure
Businesses can reclaim 100% of the VAT on the purchase and installation of electric vehicle charging points at business premises. This applies regardless of whether the charging points are for business vehicles, employee vehicles, or customer vehicles.
Record-Keeping Requirements for VAT Claims
To support VAT claims related to electric vehicles and charging costs, businesses should maintain:
Purchase invoices for vehicles and charging equipment,
Lease agreements,
Records of business vs private mileage,
Charging receipts,
Documentation of home charging costs reimbursed to employees.
Benefit in Kind (BiK) for Employees
Current BiK Rates For Electric Vehicles
Company cars that are available for private use are subject to Benefit in Kind (BiK) tax. This is due to rise from 2% to 3% for EVs in April. BiK will affect drivers who lease their cars through salary sacrifice schemes - increasing their lease costs slightly.
The BiK rate is set to increase by 1% each year from 2025/26 to 2027/28, reaching 5% by 2027/28. It is important to note that petrol/diesel cars have a maximum BiK rate of 37%, depending on the specific vehicle. Drivers choosing to go electric following these changes could stand to save significant amounts of money on their leases!
Calculating BiK For Different Vehicle Values
The taxable benefit is calculated by multiplying the vehicle's list price (P11D value) by the BiK percentage rate, then by the employee's marginal income tax rate.
Example: For an electric car with a P11D value of £40,000, the taxable benefit would be: £40,000 × 2% = £800
For a 40% taxpayer, the annual tax payable would be: £800 × 40% = £320 (just £26.67 per month)
In contrast, a comparable petrol car might have a BiK rate of 30%, resulting in a taxable benefit of £12,000 and annual tax of £4,800 (£400 per month).
Impact on Employer National Insurance Contributions
Employers must pay Class 1A National Insurance contributions (NICs) on the taxable benefit at a rate of 13.8%. For the electric car in the example above, this would amount to: £800 × 13.8% = £110.40 per year
For the petrol car, it would be: £12,000 × 13.8% = £1,656 per year
The difference represents a significant saving for the employer!
Salary Sacrifice Schemes
So, you may be wondering how EV salary sacrifice schemes work and how you can save money with them. In this section, we’ll cover everything you need to know.
How Salary Sacrifice Works for Electric Vehicles
Salary sacrifice is an arrangement where an employee agrees to give up part of their gross salary in exchange for a non-cash benefit, such as an electric car. This creates a win-win situation where both the employer and employee can benefit from tax savings.
The Electric Car Scheme offers a comprehensive salary sacrifice solution that makes it easy for employers to implement this benefit while minimising administrative burden and financial risk.
Tax Advantages For Employers And Employees
| For Employers | For Employees | |
|---|---|---|
| Reduced employer NI contributions | Reduced income tax (between 20% and 45%, depending on your tax band) | |
| No net cost to implement the scheme (with The Electric Car Scheme) | Reduced National Insurance contributions | |
| Enhanced employee benefits package to attract and retain talent | Access to new EVs at a significantly reduced cost | |
| Support for corporate sustainability goals | Simplified package, which (in most cases) includes maintenance, road tax and insurance |
Exemption from Optional Remuneration Arrangements (OpRA) Rules
Under the Optional Remuneration Arrangements (OpRA) rules, most benefits provided through salary sacrifice are taxed on the higher of the benefit value or the salary sacrificed. However, ultra-low emission vehicles (including all electric vehicles) are specifically exempt from these rules, preserving the tax advantages.
Implementation Considerations
When implementing a salary sacrifice scheme for electric vehicles, companies should consider:
The impact on employees' pension contributions and other salary-related benefits,
The National Minimum Wage implications (employees' reduced salary must remain above the NMW),
The administrative processes required to manage the scheme,
The financial risks if employees leave the company while still leasing a vehicle.
The Electric Car Scheme addresses these considerations by offering Complete Employer Protection, which protects employers from early termination costs if employees leave the company. The scheme also includes straightforward reporting tools to minimise administrative burden.
Compliance Requirements
To ensure compliance with HMRC requirements, companies implementing salary sacrifice schemes should:
Have proper documentation of the salary sacrifice arrangement.
Ensure the arrangement constitutes a genuine change to the employment contract,
Provide clear information to employees about the impact on their take-home pay and benefits.
Correctly report the benefit on P11D forms,
Apply the correct tax treatment for Class 1A NICs.
Electric vehicles offer substantial tax advantages for UK businesses, from immediate corporation tax relief through the 100% First Year Allowance to significantly reduced Benefit in Kind rates for employees. By combining these tax incentives with the operational cost savings of electric vehicles (lower fuel and maintenance costs), the business case for transitioning to an electric fleet becomes compelling.
Salary sacrifice schemes like The Electric Car Scheme further enhance these benefits by creating additional tax efficiencies for both employers and employees. As the UK continues its journey towards net-zero emissions, these incentives are likely to remain generous, making now the perfect time for businesses to electrify their fleets.
For more information on how The Electric Car Scheme can help your business implement a cost-effective salary sacrifice programme for electric vehicles, book a demo today.
Last updated: 30.04.25
