The UK Government is committed to encouraging more people to buy electric car through business or EVs. In fact, they are now offering rather generous tax breaks to encourage more business owners to go electric.
To buy or not to buy an electric car through business
A very important questions to ask, clearly. Well, consider the following tax breaks:
Capital allowances
Let’s say your business decides to buy a new (never before used) EV and as a result, you get a full year’s tax relief for the year you purchase the car in.
So, if your EV is priced at £50,000, you get to save £9,500 in CT (Corporation Tax) for the first year. You’d be pleased to know that this actually compares quite favourably to a regular car purchase through the business – where you will receive just 6% – that’s £750 – or 18% – which amounts to £1,710 tax relief – in year 1. The values may fluctuate according to the carbon emissions, but you can see a clear and distinct divide between the two.
Furthermore, up to 130% relief is available if you install charging points at your place of business. Not a bad deal at all.
Employee benefit
Did you know that you can buy a £38,900 Tesla solely for personal use and pay an annual tax of just £155.60 depending on how much income you generate each year? That’s unbelievably generous in terms of tax relief!
Road tax
The lower your carbon emissions, the less road tax you pay. Want a nice surprise? For the year 2022/2033, road tax is “zero” for zero-emission vehicles. Vehicles priced higher than £40,000 usually attract an extra £335 road tax per year, but the Government has waived this off too for zero-emission vehicles.
Grants
The UK Government has introduced generous grants in order to alleviate both the cost of buying electric vehicles and installing charging stations.
Combined with the low cost of electricity (compared to fuel) and the environmental benefits, it makes a lot of sense to make your next business vehicle purchase an electric one.
What’s the best way to buy an EV through my business?
Lease, buy, PCP, hire purchase, etc. – which option is right for you?
Let’s set the record straight: your decision to buy an EV through your business should not be primarily motivated by the tax breaks you get. Rather, you should set aside the tax benefits for a moment and consider how each option stacks up purely from a commercial standpoint. Asking yourself the following questions is a good start:
- Do I want complete ownership of the car in perhaps 5 years’ time or would I want to upgrade to a better one by that time?
- What would the total cost be under a hire purchase agreement as opposed to PCP?
- How would the cost be influenced if I account for the PCP balloon payment?
- How reliable is the car I’m interested in and how expensive or cumbersome would it be, if it were to require costly repairs in only a few months or years?
- Who will bear the cost of those repairs? The company account? My own personal income?
Now that we have determined the best approach from a commercial standpoint, we can shift our attention to the tax benefits of different buying options:
Buy – If you outright decide to purchase an EV, you will gain tax relief via capital allowances. So, if the EV costs your limited company£50,000, for example, your CT relief would be £9,500 – purchase price x 100% year one allowance x 19% CT rate.
Hire purchase – In this case, relief would also be via capital allowances, which is the same as when you pay full price for a purchase. This will be a deductible business expense, to the extent of the amount of interest charged.
Operating lease – The monthly lease fees for your EV will also be treated as a deductible business expense. Let’s assume the monthly cost comes up to £1,000. You can claim £12,000 per year as a deduction in your CT return and save £2,280 in tax. Not bad! We arrived at this figure by multiplying the £12,000 expense with the 19% CT rate.
Finance lease – With this option, the business asset (your EV) will depreciate over its economic life in the company accounts. Its depreciation, along with any interest, will be treated as deductible expenses. So, let’s assume the lease payments are coming up to £50,000 which are to be paid over a period of 8 years. You can minus 1/8th of the cost every year – that’s £6,250 – which means you’ll be saving £1,187.50 in tax. In this case, we arrived at the figure by multiplying the £6,250 depreciation with the 19% CT rate.
If you are operating as a sole trader, tax relief would be offered at your marginal rate of tax (e.g. 20%, 40% or 45%) and not at the standard 19% CT rate. Therefore, if a sole trader were to buy an electric vehicle for £50,000 purely for business use, they may save as much as £22,500 in tax by purchasing it through their business – £50,000 x 45% Additional Rate.
Closing thoughts: Why not just buy a car on my own?
Well, you’d want to consider the following example before doing so:
Alex is an accountant who runs his own accountancy firm. He wants to buy an Electric car through business mostly for his own use. He is able to spend £50,000 on the car and is a higher rate taxpayer.
Option #1
Alex asks his company to declare a £50,000 dividend which he can then use to buy the EV. He pays tax on the dividend at 33.75%. This costs him, minimum, £16.875 in income tax.
Option #2
Alex asks his limited company to purchase the electric car. Since there’s no dividend tax to pay, he immediately saves £16,875. Alex can also claim capital allowances, so, that means an additional £9,500 saving in CT. For the year 2022/23 tax on the benefit will only be £400. Overall, Alex saves £25,975 buying the EV through his company than buying it on his own – that’s over 50% of the EV’s value!
You can clearly see which option is the better one!
It should be noted, however, that the above example would play out differently if Alex was running his business as a sole trader.
Hopefully, this article has helped you see the value to be had when buying an electric car through business!
