Currently reading: What are the tax breaks for electric company cars?

Switching from petrol or diesel to an electric company car is an incredibly effective way to reduce your tax bill

Businesses account for almost half of the UK’s new car market and, with over 700,000 company car drivers according to the latest HMRC statistics, the government has spent the past 20 years using tax incentives to fuel demand for vehicles with the lowest CO2 emissions. 

Company car tax bands are usually adjusted every April, at the start of the new financial year, and they’re under constant change. They’ve stimulated demand for diesel and hybrid cars, but today the biggest savings are reserved for electric vehicles and businesses are taking note. According to the British Vehicle Rental and Leasing Association, over half of new business contract hire deliveries are now battery powered. 

With a growing choice of vehicles, longer ranges and ever-improving charging infrastructure, an electric company car is becoming more and more of a no-brainer. Here’s why. 

How much cheaper is electric company car tax?

If you’re doing a lot of business mileage, then you might be lucky enough for your employer to issue you with a company car. Often seen as a top-tier perk of the job, these are usually brand new, fully maintained and also available outside work hours, just like a privately owned vehicle. Naturally, there’s a tax implication if you opt in.

HMRC classes company cars as a benefit in kind (BIK), which is a term applied to most perks provided on top of your salary. Tax bills vary enormously, but the system is heavily weighted against cars with the highest tailpipe CO2 emissions. This favours electric vehicles, which don’t have a tailpipe at all, and therefore get the biggest discounts.

Kia EV6 2022 front quarter driving

The calculation is more straightforward than it looks. All company cars are assigned what’s called a ‘taxable value’, which is a percentage of the list price (ranging from 2% to 37%) based on its CO2 emissions. Those bands are frozen until April 2025, which means electric vehicle drivers are only being taxed based on 2% of the list price until that date. For comparison, even the most efficient petrol, diesel or so-called ‘self-charging’ hybrid is taxed at 25% or more. 

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Although the tax bands will increase every April from 2025 onwards, in line with the new financial year, HM Treasury has confirmed that those incentives will remain in place until at least 2028. 

The following table shows some examples, based on the 2022-2025 tax bands:

Vehicle

Type

P11d

BIK rate

Taxable value

Peugeot e-208 Allure Premium+

Electric

£32,840

2%

£657

Peugeot 208 1.2 PureTech 100 Allure Premium+

Petrol

£22,745

28%

£6369

BMW i4 eDrive40 M Sport

Electric

£57,835

2%

£1157

BMW 320d M Sport Auto

Diesel

£43,540

30%

£13,062

Drivers’ annual benefit-in-kind payments are a percentage of the taxable value, which matches their income tax rate. England, Wales and Northern Ireland use three bands (20%, 40% and 45%), while Scotland has five (between 19% and 46%). For example, a 20% taxpayer would pay 20% of the taxable value each year, split equally across their payslips. 

Continuing the examples above, an electric car could reduce a driver’s tax bill by between 90 and 95%.

How are fleets being incentivised to use electric cars?

BMW i4, Jaguar I-Pace and Genesis GV60 driving around test track

HM Treasury hasn’t overlooked the extra costs for fleet operators. An electric car is usually more expensive to lease than an equivalent petrol or diesel model, but there are several tax incentives in place to tip the business case back in their favour.

Unlike with a combustion-engined car, businesses can deduct the full cost of buying or leasing an electric vehicle from their pre-tax profits, resulting in lower tax bills. 

Electric cars also qualify for zero-rate vehicle excise duty (VED, or 'road tax') and are exempt from the levy (currently £390) that's applied if the list price is £40,000 or more. VED exemptions will be withdrawn in April 2025, and (excluding the £390 levy) this includes vehicles that are already on the road. 

Recurring tax costs are lower too. Employers pay class 1A national insurance contributions (NICs) for providing workplace perks. These are paid at a flat 13.8% of the taxable value, which means it’s just as heavily CO2-weighted as drivers’ benefit-in-kind payments.

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Herman G. Rinco... 26 June 2024
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skikid 10 August 2023

yes the only reason ev's are selling is 2% tax v  30% OR MORE FOR PETROL /DIESEL THEY WOULD NOT SELL EXCEPT FOR THIS EVEN NORWAY  AND MANY EU STATES GIVE VAT FREE PURCHASES OR LARGE REBATES ,uK IT IS IF YOU HAVE COMPANY CAR NO BRAINER TO GET ONE AND WITH THE 12K YOU SAVE ON TAX YOU CAN FUND A GREAT 4X4 FOR YOUR PARTNER BASICALLY FOR FREE.