Electric Company Car Tax Guide for UK Directors

More and more UK companies are choosing electric cars for their directors and teams. For many owner managed businesses and fast growth start-ups, the decision is not just about being greener. It is also about understanding how the tax rules work and whether an electric company car really is the most efficient option.

The benefit in kind rules for company cars have changed several times over the last few years, and there are additional layers such as capital allowances, mileage rates and charging costs to think about.

In this guide we explain how electric company car tax works in practice, what the current and future benefit in kind rates look like, and the key questions to ask before your company signs an order.

Agile Accountants are based in Birmingham city centre and work with limited companies across the UK. We can help directors understand the numbers behind electric company cars so they can make decisions with confidence.

What do we mean by electric company car tax

When people talk about electric company car tax, they are usually talking about three connected areas:

• Benefit in kind tax (BIK) for the person using the car, typically a director or employee
• Employer costs, including Class 1A National Insurance and any impact on salary or bonuses
• Corporation tax relief, mainly through capital allowances on the cost of buying or leasing the car and installing charge points

On top of that you need to consider:

• Mileage rates and what the company can reimburse tax free
• Charging costs, including whether workplace or home charging creates a taxable benefit
• Vehicle Excise Duty (road tax), which now applies to many electric cars

An electric company car can still be very tax efficient, but it is important to see the whole picture, not just the headline benefit in kind rate.

Why electric cars became attractive company cars

Electric cars became popular as company cars because the tax rules were designed to encourage a move away from traditional petrol and diesel vehicles.

For directors, the biggest incentive has been the benefit in kind percentage applied to fully electric cars, which has been set at a much lower level than for most petrol and diesel models.

Benefit in kind rates for electric cars so far

Benefit in kind on a company car is the amount that HMRC treats as taxable because you have the use of that car.

For cars, it is worked out by taking the P11D value of the car (usually the list price including options and VAT) and multiplying it by the benefit in kind percentage that applies. That percentage is set by HMRC and is based on the car’s CO2 emissions and, for some low emission cars, its electric range.

For a fully electric company car with zero emissions, the percentage in 2024/25 is 2%.

To give a feel for this:

If the P11D value of the electric car is £40,000 and the benefit in kind rate is 2%, the taxable benefit is £40,000 x 2%, so £800 a year is added to your taxable income. The company then pays Class 1A National Insurance contributions at 13.8% on the £800 benefit, which is £110.40 a year.

The employee pays income tax on the same £800 at their marginal rate, often 20% (£160 a year) or 40% (£320 a year). These are all annual tax amounts.

By comparison, many petrol and diesel company cars are taxed at percentages in the high twenties or thirties, which means a much larger slice of the list price is treated as taxable each year.

This low percentage is a big part of the appeal of electric company cars, particularly for higher rate taxpayers.

Future increases you need to plan for

The low 2% benefit in kind rate on fully electric company cars is not permanent. The government has already set the percentages for the next few years:

• 2025/26: 3%
• 2026/27: 4%
• 2027/28: 5%
• 2028/29: 7%
• 2029/30: 9%

Even at 5%, an electric car is usually taxed more lightly than a typical petrol or diesel company car, but the tax cost will steadily increase.

If you are looking at a three or four year lease, it is important to:

• Check the benefit in kind percentage for each tax year you will have the car
• Estimate your total tax cost over the whole term
• Compare that with other options, such as a petrol or hybrid company car, a car allowance or using your own car

That way, you are making a long term decision with your eyes open, rather than focusing only on the current 2% rate.

How electric company car tax is calculated

Once you know the P11D value and the benefit in kind percentage, the calculation itself is fairly straightforward.

For a fully electric car:

1. Work out the taxable benefit
   • P11D value x benefit in kind percentage
2. Apply the individual’s income tax rate
   • The taxable benefit is added to their income and taxed at 20, 40 or 45% as appropriate
3. Employer pays Class 1A National Insurance
   • The same taxable benefit figure is used to calculate the employer’s Class 1A National Insurance charge

The important point is that the percentage for electric cars is currently much lower than for most petrol and diesel cars, so the taxable benefit and the resulting tax bills are often significantly lower.

A simple example comparing electric and petrol

To see how this works in practice, let us compare the same car as an electric model and as a petrol model, both with a P11D value of £40,000 in 2024/25.

Electric car in 2024/25

• Benefit in kind percentage: 2%
• Taxable benefit: £40,000 x 2% = £800
• For a basic rate taxpayer (20%):
  • Personal tax cost: £800 x 20% = £160 a year
• For a higher rate taxpayer (40%):
  • Personal tax cost: £800 x 40% = £320 a year
• Employer Class 1A NIC:
  • £800 x 13.8% = £110.40 a year

So for an electric company car with a £40,000 P11D value, the annual personal tax cost is £160 for a basic rate taxpayer and £320 for a higher rate taxpayer, plus £110.40 a year in Class 1A NIC for the employer.

Comparable petrol car at 30% benefit in kind

• Benefit in kind percentage: 30%
• Taxable benefit: £40,000 x 30% = £12,000
• For a basic rate taxpayer (20%):
  • Personal tax cost: £12,000 x 20% = £2,400 a year
• For a higher rate taxpayer (40%):
  • Personal tax cost: £12,000 x 40% = £4,800 a year
• Employer Class 1A NIC:
  • £12,000 x 13.8% = £1,656 a year

In other words, compared to a petrol car, the electric car dramatically reduces the taxable benefit and therefore both the employee’s annual tax bill and the employer’s annual Class 1A NIC bill.

Corporation tax relief and capital allowances on electric cars

Electric company cars also interact with corporation tax, through capital allowances.

First year allowances for new zero emission cars

New and unused zero emission cars can qualify for 100% first year allowances. This means that, subject to the detailed conditions being met, your company can usually deduct the full cost of the car from its profits in the year of purchase.

In practice, for a profitable company, this can:

• Reduce corporation tax for the year of purchase
• Help with cash flow planning when you are investing in a higher cost electric car

There are similar rules for qualifying spend on installing electric vehicle charge points at your business premises.

What if you buy a used electric car

If your company buys a used electric car, the rules are different:

• The car will not qualify for 100%  first year allowances
• Instead, it will usually go into the main capital allowances pool, and you will claim relief over several years through writing down allowances

You still get tax relief, but it is spread over time rather than all at once.

Mileage rates, charging costs and benefits in kind

Running an electric company car raises additional questions about mileage and charging.

Advisory electricity rates for company electric cars

HMRC publishes Advisory Fuel Rates every quarter, including an advisory electric rate for fully electric cars. Employers use these when:

• Reimbursing employees for business mileage in a company car
• Calculating how much an employee should repay for private mileage

If your reimbursement rate for business mileage in a company car does not exceed the relevant advisory rate, it is normally treated as tax free and there is no extra National Insurance.

If an employee uses their own electric car for business travel, the usual Approved Mileage Allowance Payments apply. These are currently 45 pence per mile for the first 10,000 business miles in a tax year and 25 pence per mile thereafter, regardless of fuel type.

Workplace and home charging for employees and directors

HMRC has brought in specific rules to encourage employers to provide charging facilities:

• Charging at work
  • Providing charging facilities at or near the workplace for employees and directors can be exempt from benefit in kind, if certain conditions are met.
• Charging a company car at home
  • Reimbursing the cost of electricity for charging a company car at home can be done without creating an additional benefit in kind, provided it is handled correctly and is limited to business use.

The detail in this area is technical, especially where business and private mileage are mixed, so it is sensible to get advice before finalising your charging and reimbursement policies.

Salary sacrifice, cash allowance or private car

Some employers offer electric company cars through salary sacrifice schemes. These can be attractive because:

• The employee gives up part of their gross salary
• In return, they get the use of an electric company car that has a low benefit in kind percentage
• Both the employee and employer can save on income tax and National Insurance overall

For owner managed businesses, you also need to think about:

• How salary sacrifice might affect pension contributions, mortgage assessments and other benefits
• Whether a cash allowance and a personally owned car might be more flexible
• How the numbers compare to simply taking more dividends and using your own car for business mileage

There is no single correct answer. It depends on how you are paid, how profitable the company is, and how many genuine business miles you do.

Is an electric company car right for your business

Electric company cars can still be very tax efficient, particularly for higher rate taxpayers and profitable companies that can use first year allowances.

However, before committing to a lease or purchase, directors should consider:

• The future benefit in kind increases over the life of the car
• The impact of Vehicle Excise Duty now that many electric cars no longer benefit from a full exemption
• How and where the car will be charged day to day
• Whether a company car, a cash allowance or a privately owned car is the best fit for your business and personal circumstances

A short piece of modelling can often make the decision much clearer.

How Agile Accountants can help

As a Birmingham based firm working with owner managed businesses and fast growth start-ups across the UK, Agile Accountants focus on the tax and financial side of your decision. We do not recommend specific makes or models, and we do not provide regulated financial advice on leasing products. What we can do is:

• Help you understand how electric company car tax applies to your situation
• Compare the tax and cash position of an electric company car with petrol, diesel and hybrid alternatives
• Model benefit in kind and employer National Insurance over the proposed lease term, including the planned increases in rates
• Explain how capital allowances and first year allowances will affect your company’s corporation tax
• Work with your finance broker, leasing company or other advisers so that everyone is working from the same tax assumptions

If you are thinking about switching to an electric company car, or want to sense check a salary sacrifice or lease proposal you have already received, we would strongly recommend getting tailored advice before signing any agreement.

If you would like to explore how electric company car tax would work for your company, get in touch with the team at Agile Accountants to arrange an initial conversation and a clear set of numbers to support your decision.