A company car for an employee or director of a limited company is treated in a similar way to other benefits in kind, in that it is normally an allowable expense for the purposes of the business (subject to it being “wholly exclusively for the purposes of trade” – a complex area), and is notionally “free” (of national insurance and tax) to the the employee.
But the employee is treated as having a level of income, in the form of a P11D benefit, on which income tax is due. For nearly 20 years the P11D value of vehicles has typically been based on the cars emissions, and since 2020, an electric vehicle (EV), subject to qualifying criteria (which an EV should comfortably pass, as would many hybrids), has been more privileged.
In 2020/21 there was no tax on an EV, and an EV is only subject to a 1% P11D tax charge in the 2021/22 tax year.
In other words, a higher rate tax payer (40%) with a £40,000 (list price) electric vehicle as a company car, will suffer a tax charge of 40% of 1% (£1,600) on their £40,000 electric vehicle, through the P11D benefit system.
It should be noted this P11D benefit does increase over the forthcoming years as detailed on the Government website (link), but can be appealing for many people.
Another variable to consider is the number of business miles that the employee does, and the mileage expense rules adopted by their employer. It is possible to pay up to 45p per mile for the first 10,000 miles, so an individual who does 10,000 miles could reclaim £4,500 on a personally owned vehicle. If the employer rate is less generous HMRC should grant relief on the difference.
As explained in my previous piece, an EV may actually have very little in the way or running or “fuel” costs. But as a company car, HMRC rules only allow an individual to reclaim 4p per mile. There are other incentives an employer might provide, for example, free electric vehicle charging at work, on which there should be no tax implications on the employee.
Naturally, many of my clients are retired and therefore there is no prospect of them receiving a company car as an employee and for that reason the financial decision to buy an electric is more around mileage as detailed previously. But for those who are working and have access to a company provided electric vehicle as an alternative to a personal vehicle or an internal combustion engine company vehicle, the decision is more straightforward. The economics can turn a “do not buy” into a “buy” (for financial reasons) due to the tax incentives highlighted above.
For owner manager businesses an electric car purchase can be a legitimate means of profit extraction. Given changes to the national insurance as detailed by the spending review announced by Rishi Sunak on the 7th September 2021, which will culminate in the Autumn statement at the end of October, and the March 2021 announcement to raise Corporation Tax from 19% to 25%, now is a very relevant time for directors to consider their remuneration, in terms of income taxed under PAYE, as well as dividends, pension contributions, provision of company cars and other relevant benefits.
Note: The tax area can be complex, so please speak to your tax adviser before taking any action; I also think it’s worth considering the other main forms of profit extraction for directors too.