The lowdown on company car tax for electric cars

  • Electric cars
  • Nov 24, 2020

For employees, last year's Benefit in Kind (BiK) changes were a game changer for leasing an electric car, lowering the monthly cost of getting behind the wheel by between 32 and 42% depending on your tax rate.

The April 2020 changes meant a 0% tax rate for zero-emissions vehicles for 2020/21, which has risen to 1% in 2021/22 and then stays at just 2% until 2024/25.

These BiK changes make electric cars a perfect match for 'perk' drivers under a salary sacrifice scheme. Salary sacrifice 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. From April 2020, BiK for full electric cars (BEVs) fell from 16% tax rate to 0% tax for a car leased under a salary sacrifice scheme.

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

Salary sacrifice 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 fund your zero emissions car.

Find an EV that fits

Check your EV savings

Salary sacrifice schemes used to be quite beneficial for all 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. Now, if you opt for a car with CO2 emissions greater than 76g/km you'll pay income tax on the greater of the taxable value of the car or the salary being sacrificed - an estimated increase of up to £240/year more.

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.

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

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.

Salary sacrificing a new electric car makes it substantially more affordable, and over 2020 the choice of fully electric cars is growing, with popular cars such as the Golf-sized VW ID.3, Peugeot e-208 and Mini Electric.

Add the lowest costs per mile

The low cost per mile in an electric car adds even more incentives for a driver to go electric. If you are powering your EV at home with an overnight tariff, your true costs could be close to 1p/mile.

Charging top tips: How to fill your car for even less

Overnight charging: The best home energy tariffs for an EV driver

Why your 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.

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

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. www.gov.uk/calculate-tax-on-company-cars

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.

The extra cost associated with an EV soon pays back, though cheaper running costs. Employees able to take advantage of salary sacrifice schemes may find the BiK incentives are an even bigger advantage.