The Tax Advantages of Buying an Electric Car

Electric vehicles (EVs) are not only a great choice for the environment, but they also come with a range of tax benefits that can make them financially attractive. Whether you’re an employed individual, a business owner, or self-employed, there are several ways to take advantage of these incentives. Let’s explore the different scenarios:

1. Employed Individuals

For employed individuals, a salary sacrifice arrangement can be a smart way to finance an electric car. Here’s how it works:

• Salary Sacrifice: You agree to give up a portion of your pre-tax salary in exchange for a non-cash benefit, such as an electric car. This reduces your taxable and pensionable income, which lowers the amount of tax and pension contributions you pay.
• Tax Savings: The amount sacrificed is deducted from your gross salary before tax, meaning you pay less income tax and National Insurance contributions.
• Benefit in Kind (BIK): Electric cars attract a lower BIK rate compared to traditional petrol or diesel cars. For the tax year 2025/26, the BIK rate for fully electric cars is set at 3%. This will increase by 1% in 2026/27 and a further 1% in 2027/28. The BIK is calculated based on the vehicles list price.
• Potential drawbacks: Due to the cost of the car coming out of the employee’s salary, there would be a reduction in take home pay which can affect affordability checks for things such as mortgage applications. In addition, when the arrangement comes to an end, pensionable income increases, which may be problematic from an annual allowance tax charge perspective. Also, the vehicle is tied to your employer, meaning that if your employment ceases, you also lose the car.

2. Purchasing via a Company:

If you run a business, purchasing an electric car through your company can offer significant tax advantages:

• Benefit in Kind (BIK): As mentioned, electric cars have a low BIK rate. This means that the taxable benefit for employees, including directors, using company cars is minimal.
• Corporation Tax Relief: Companies can claim 100% first-year capital allowances on the purchase of new electric cars. This allows the full cost of the car to be deducted from the company’s profits before tax.
• Running costs: The car will be owned by the company, therefore the company will be responsible for the running costs such as insurance, road fund licence and repairs/maintenance.
• Potential drawbacks: The company is the owner of the vehicle, accessing finance for purchasing the car may be harder to obtain, and more expensive than a personal loan. The company benefits from tax relief, but the individual who uses the car suffers a BIK tax charge, increasing their personal tax liability, albeit only by a small amount due to the low BIK rates for electric cars.

3. Self-Employed Individuals

Self-employed individuals have two main options for claiming tax relief on electric cars:

• Capital Allowances: Similar to companies, self-employed individuals can claim 100% first-year capital allowances on new electric cars providing that the car is used solely for business purposes. This means you can deduct the full cost of the car from your taxable profits in the year of purchase. The capital allowance rate for pre-owned cars is 18%.
• Running costs: You can also claim the ongoing running costs of the vehicle, including charging costs, for the business use proportion.
• Mileage Basis: Alternatively, you can claim a mileage allowance for business travel. For electric cars, the approved mileage allowance payments (AMAPs) are 45p per mile for the first 10,000 miles and 25p per mile thereafter. This method can be simpler and more beneficial if you drive a lot for business purposes.
• Potential drawbacks: To claim capital allowances and running costs, detailed records must be kept, detailing the costs and business usage throughout the year, which can be time consuming. In addition, as the business usage varies, when the car is disposed, an adjustment for the average amount of business usage must be made. If business use is high in the first year, when 100% capital allowances are claimed, and then subsequently decreases, this can create a tax charge at the point of disposal.

Conclusion

The tax advantages of buying an electric car can be substantial, whether you’re employed, running a business, or self-employed. By understanding and leveraging these benefits, you can make a more informed decision that not only supports a greener future but also makes financial sense.