In 2022, some 267,000 electric vehicles (EVs) were
registered in the UK – up 40% on the previous year. Despite their growing popularity, they still
account for only one in every six new cars.
The government, currently insisting that the ban on the sale of internal
combustion engine (ICE) cars will still take place 2030 (with the sale of
hybrids banned from 2035), is taking big steps to encourage a greater take-up
of EVs.
Most of those incentives are in the tax realm, and
this is particularly the case for EVs bought as company vehicles (fleet sales
are thought to account for around four in five of all EV registrations).
It’s not hard to see why: for company car drivers,
the savings are huge. Currently, the
benefit in kind for an EV is just 2% of its manufacturer’s list price, so a
higher rate taxpayer would pay just £400 tax per year on a £50,000 vehicle.
This rate is due to rise by 1% a year from 2025, but
only to a cap of 5% in 2027/28 – still much lower than the rate for ICE
vehicles, which is currently anywhere between 15% and 37%, depending on the CO2
emissions.
For employers purchasing EVs, there are big benefits
too. First and foremost is the fact that
for new and unused EVs (which includes demonstrators and vehicles with
test-drive mileage), companies can claim a 100% first year capital
allowance. Given that cars do not
qualify for the Annual Investment Allowance, this is a very valuable benefit –
for ICE cars tax relief in any one year is limited to a maximum of 18%, and
even that figure only applies to the most efficient vehicles.
Where an EV is leased by way of an operating lease (i.e.
hired for a set number of years and then returned), the full monthly rental
payment is an allowable expense against tax.
If it is used as a company car (i.e. with an element of private use),
then only 50% of the VAT on the monthly rental payment can be claimed, as is
the case with ICE vehicles.
There are similar benefits for electric vans. Employees who take a work van home don’t have
to pay the usual £3,600 annual benefit in kind tax charge if the van is
electric.
As you might expect, the tax treatment of plug-in
hybrid vehicles (PHEVs) falls somewhere between that of pure EVs and full ICE
vehicles. The benefit in kind rates
depend on the CO2 emissions and the all-electric range of the car; for a
vehicle with emissions below 50g/km and with an electric range of between 40
and 69 miles, the rate is currently 8%.
Another benefit of EVs is the saving in vehicle
excise duty (VED). Currently EVs are
exempt from this, although in the Chancellor’s autumn statement it was
announced that from April 2025 the VED for EVs will be the same as that for ICE
cars emitting less than 50g/km of CO2.
Likewise, the Expensive Car Supplement Exemption, which means EV owners
don’t pay the £355 extra charge for the first five years where the vehicle cost
£40,000 or more – likely to include most EVs – is being removed in 2025.
Overall, though, both employers and employees can
enjoy significant tax advantages by driving an EV over a traditional ICE
car. This, of course, is in addition to
reduced running costs, and the increasingly important PR aspects of being seen
to be environmentally responsible when it comes to running your fleet.
