The lowdown on company car tax for electric cars

  • Electric cars
  • Oct 07, 2020

For business car users, this year’s Benefit in Kind changes are a financial game-changer for driving an electric car, saving between 32 and 42% of the monthly cost of getting behind the wheel. (Not forgetting the lower cost of actually getting around in an electric car!)

Tesla 3 0% BiK
A typical saving for a company car driver picking up a Tesla 3 with a 0% BiK

The running costs of electric cars are indeed much lower. The HMRC's own calculation is that electric vehicles should be reimbursed at a rate of only 4p per mile. If you are powering your EV at home with an overnight tariff, your true costs would be closer to 1p/mile.

Further reading: How to charge your car for less

The key to the cost reduction for electric company cars is salary sacrifice, which is the system companies use for pension contributions, cycle to work schemes and childcare vouchers. This scheme allows their workers to pay for these things before tax.

It’s a fairly simple concept, you opt to forgo a chunk of your salary and your employer pays that into your pension, bike repayment, childcare voucher scheme instead.

This saves you both national insurance and income tax - which effectively saves you  32p (for a basic rate taxpayer), and as a higher rate taxpayer 42p, for every £1 you place in the system. So, rather than getting paid £1 and you can make payments of £1.32-£1.42 out to childcare providers etc.

The exciting change that happened in April 2020, simply means that these salary sacrifice benefits are felt in full for electric cars. This is because electric cars now have a zero BiK (Benefit in Kind) rate.

Salary sacrifice schemes used to be quite beneficial for company car drivers; the cost of the car could be deducted from the salary pre-tax to pay for a vehicle on the scheme, with the employee effectively paying tax only on the BIK charge. This now applies solely to ultra-low emission vehicles - those rated at 75g/km of CO2 or less.

He shouldn't be on the phone behind the wheel, but he's got the 0% BiK right

If you needed to make that any more attractive, you can also bundle insurance and servicing plans into the salary sacrifice! Plus there are tax advantages for your employer to cover the installation of an EV charging point at your home. Check out the details with your HR department.

How does the 0% BiK work out for a Tesla?

As an example, the monthly cost for a Tesla Model 3 Standard Range Plus with £6,000 deposit down over 48 months could be roughly £776. Under salary sacrifice for a higher rate taxpayer it equates to £450 out of the wage packet they would normally see.

Salary sacrificing a new electric car makes it substantially more affordable and choice is growing, with the Golf-sized VW ID.3, Peugeot e-208 and Mini Electric all just landed.

The VW ID.3, Peugeot e-208 and the Mini Electric are all great affordable BEV choices

If you could buy a car now you will get a £3,000 grant and 0% BiK. Which rises to just 1% in 2021-22 and 2% in 2022-23), and remains the same rate in 2023-2024 and 2024-2025.

This zero BiK and government grant may be something of a sweet spot. No end has been placed on the grant, but it has lowered each year and is obviously constantly under review. As prices of electric cars come down, the government may see the need to boost the EV industry as dropping down its list of priorities. Next year the BiK rates start to rise too.

Maybe it’s time to start lobbying your work? Don’t forget to tell them about the following benefits that an EV brings to the employer!

tax incentives to install chargers at work and at your home
Your company has tax incentives to install chargers at work and at your home

Why an employer should care about electric company cars

In four (and a bit) words, Class 1A National Insurance Contributions. Your employer pays National Insurance on benefits in kind such as your company car which are given to you as part of your 'salary package'. This charge is called Class 1A.

The advantage of reduced BiK rates on electric vehicles (that reduce your income tax liability), also saves employers on their Class 1A National Insurance liability.

Class 1A NICs based on the vehicle's P11D value and relevant BiK rate are applicable as determined by the official carbon emissions and fuel type.

Guidance on employers NI contributions is available in full here: An employer’s guide to Class 1A National Insurance contributions

There are other benefits for companies.

  1. Fully electric cars do not have any fuel scale rate charges applied to them, as electricity is not a fuel. For reimbursement of mileage, your employer will use the approved electricity rate of 4p per mile. (See Advisory Fuel Rates).
  2. BiK is also relevant to electricity provided to charge employees' vehicles at the workplace, although this is currently exempt (rated at 0%).
  3. There are also tax advantages if your employer provides you with charging facilities at your workplace - this even stretches to the installation of a vehicle charging point to be installed at your home.
  4. Capital allowances. Employers can offset the cost of cars purchased for business from profits before tax. The emissions level to qualify for a full deduction is 50g/km and this reduces to zero emissions from April 2021. You can see the full breakdown of all of the new bands of emissions which affect capital allowances on the UK government website here.

Employers calculating tax on company cars can use this HMRC calculator.

What is the Workplace Charging Scheme?

The Workplace Charging Scheme, or WCS, is a voucher-based scheme designed to provide eligible applicants with support towards the upfront costs of the purchase and installation of EV charge points. The contribution is limited to the 75% of purchase and installation costs, up to a maximum of £350 for each socket, up to a maximum of 40 across all sites for each applicant.

workplace charging
A workplace charging installation for electric vehicles

Applicants will apply for the scheme using the Government’s online application portal. Work is carried out by any OLEV-authorised WCS installer.

Once the charge point(s) have been installed, the authorised installer will claim the grant from OLEV on the applicant’s behalf.

There’s no doubt that electric car sales are growing - up over 150% so far this year, according to the industry figures. But the same old factors seem to be holding more people back from making the switch: cost, charging infrastructure and range. Of these, the biggest is probably cost.

Part of the problem for EVs is that the UK has a historic preference for second hand cars compared to other European countries. With second hand electric cars a bit thin on the ground, old and new electric vehicles all come with comparatively high price tags. But the extra cost soon pays back, especially for employees!