Going electric - the tax implications of electric company cars

The government plans to provide millions in funding to local authorities and homeowners to install electric vehicle charge points to incentivise drivers to “go electric”.

Businesses can increase demand for electric vehicles by making them available under company car schemes but need to consider the related tax implications.

In the third article of our series, Tax in 2024 for the Future Energy Sector, the TLT tax team provide an overview of the tax implications for businesses and employees of “going electric”.

How are company cars usually taxed?

If an employer makes a car available to an employee (or a member of their family or household) in a tax year, without ownership in the car being transferred to that person, and the car is available for private use then a taxable benefit in kind (BiK) arises for the employee.

The cash equivalent of the benefit of the car is taxed as the employee’s earnings for the relevant tax year, meaning that the employee will pay income tax at their marginal tax rate based on the value of the BiK they receive, and the employer will pay Class 1A NICs based on that amount.

Calculating the cash equivalent involves, broadly, multiplying the manufacturer’s list price for the car when new (less any capital contributions to the cost of the car made by the employee) by an “appropriate percentage” and deducting any amounts paid by the employee for the private use of the car. The “appropriate percentage” depends on the CO2 emissions of the car.

Are there tax benefits for an employee of choosing an electric company car?

Yes, employees can make significant income tax savings if they choose an electric company car over a petrol or diesel car. This is because the “appropriate percentage” for electric cars is fixed at 2% until April 2025 (annual 1% increases are planned until 2028) which is significantly lower than the percentages for petrol and diesel cars, which can be as high as 37%.

Also, until 1 April 2025, there is no vehicle excise duty (being an annual tax paid by owners of vehicles driven or kept on public roads) payable in respect of electric vehicles. By comparison, for petrol cars the current standard flat rate of vehicle excise duty is £190.

New zero-emission electric cars registered on or after 1 April 2025 will only be required to pay vehicle excise duty at the lowest first-year rate, currently £10 a year (the standard rate will apply from the second year of registration).

Are there tax advantages for an employer of offering electric vehicles as company cars?

Yes, there are some notable advantages for employers, including:

• where a new and unused fully electric vehicle is purchased outright before 31 March 2025, the business can claim a 100% first year capital allowance against the business’ profits;
• where the vehicle is leased, the full leasing costs of the electric vehicle can be deducted from the business’ profits (as the usual 15% restriction for car leasing only applies if emissions exceed 50g/km); and
• a lower BIK charge for an employee choosing an electric company car will result in a significantly reduced Class 1A NICs charge for the employer, although the saving may potentially be outweighed by the additional cost to the employer of providing an electric car.

Could salary sacrifice be used to assist in the funding of electric cars?

Yes, it is possible to establish a tax efficient salary sacrifice scheme to fund the cost to an employee of purchasing a fully electric car, or a hybrid car with emissions of less than 75g/km. This is because the optional remuneration legislation (which treats the taxable value of a company car as the higher of the salary given up and the cash equivalent of the benefit of the car) does not apply to these types of car.

In a salary sacrifice scheme, the employer would typically acquire an electric car, under a lease arrangement, and supply that electric car to their employee. The employee then agrees to a reduction in their gross salary equivalent to the lease cost, thereby saving an amount equal to the income tax and NICs on the salary that is given up.

As a result of the salary sacrifice:

• the employee makes savings on the overall cost to them of acquiring the electric car. For example, if the lease deal on a car was £580 a month, the gross salary cost to a 40% tax payer would be £1,000 per month (as they would pay £400 of tax and £20 of NICs on that amount leaving £580 to fund the lease deal). Under a salary sacrifice arrangement, the gross salary cost to that taxpayer is only £580 a month, being the amount sacrificed to fund the lease deal; and
• the employer saves on both the salary costs and the related employer NICs. These savings effectively offset the cost the employer incurs in providing the electric car.

Are there tax implications if an employee charges their company car for free at work?

No, there is no taxable benefit if an employee uses workplace facilities to charge their electric company car for free at work (the fuel benefit charge does not apply in these circumstances).

Also, no taxable benefit will arise if an employee uses workplace facilities to charge an electric car (that is not a company car) used by them (including as a passenger) provided that the relevant charging point is both:

• ‘at or near’ the premises; and
• available generally to all employees, or all at that workplace.

What if the employer reimburses the employee for the cost of electricity used at home to charge a company car?

HMRC has recently updated its position on residential charging so that reimbursement to an employee of the cost of electricity used at home in charging a company car that is available for private use will not trigger an income tax and NICs liability. However, employers will need to ensure that the reimbursement made towards the cost of the electricity is solely for the company car.

Are the tax implications different if the employee charges the car using public charging facilities?

No – the tax consequences are the same. So no BiK will arise where an employer reimburses an employee for the cost of using public charging facilities to charge a company car that is available for private use. Can an employer install an electric vehicle charging facility at the employee’s home tax-free?Yes, if the employer pays for a charging point to be installed at the employee’s home to enable the employee to charge a company car which is made available for private use, no taxable benefit arises for the employee.

TLT comment

The current tax benefits available for electric company cars, including HMRC’s recent relaxation of the rules around reimbursement of the costs of home-charging, are attractive for both employees and employers. However, in our experience, it’s the offer of electric company cars in conjunction with salary sacrifice that provides the real incentive for employees to make the switch to electric.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.