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Business Services  •  Business Tax  •  Personal tax  •  Uncategorized

Would an electric vehicle company car scheme benefit your business in 2023?

By RJP LLP on 13 December 2022

Switching to electric vehicles (EVs) can be very tax efficient and you may wish to consider offering them to employees as part of a company car scheme in 2023. The system is quite complex and there are many elements to consider. This article explains what the tax benefits are if you wish to offer EVs as company cars in your business.

Before going into detail about the schemes, one thing to highlight is that whilst EVs are not currently subject to road tax (VED, Vehicle Excise Duty), this is changing. In the recent Autumn Statement, Jeremy Hunt announced that road tax would start to be levied on EVs from 2025. From 1 April 2025, all electric car owners will be required to pay the standard rate of road tax VED, which is currently £165 per year. EV drivers who own a car with a list price of £40,000 or more will also pay the £355 premium car tax rate, which will take their yearly VED rate to £520. The new electric car road tax rate will apply to cars first registered on 1 April 2017, which means it will be backdated to include millions of used EVs in the UK.

Regardless of this, EVs as company cars still offer advantages, one of which is the lower deemed benefit in kind value which significantly lowers the tax payable on the benefit in kind applying to company cars.

Offering an EV as a company car

When tax on a company car is calculated, the value of the benefit is taxed at the employee’s marginal (highest) rate of tax and the employer also pays national insurance contributions (NICs) on the value of the benefit. The benefit in kind value assigned to a car is based on the vehicle’s list value with a multiplier for its CO2 emissions, fuel type and, for an electric car, its range. The lower the emissions, the lower the deemed benefit in kind, which is one reason why EVs have become so popular as company cars. Opting for a lower emission car will result in a lower a benefit in kind value, meaning less income tax to pay for the employee, and less NICs for the employer. The appropriate percentage for a battery electric vehicle is currently frozen at 2% until 5 April 2025 and will rise to a maximum of 5% in the 2027/28 tax year.

The taxable benefit value isn’t the only consideration if you are thinking about switching to electric vehicles. There are other factors - charging infrastructure, provision of electricity, expenses policies, reporting requirements, plus HMRC compliance to factor into the calculations.

Tax advantages of an EV company car

A battery electric vehicle with a list price of £32,200 would attract a benefit in kind charge of £644 and just £129 in income tax. Conversely, a fuel car costing £25,900 would attract a £7,252 benefit in kind charge and £1,450 in income tax.

In essence the employee would see a 91% drop in the amount of income tax paid on the company car benefit in kind, which equates to an increase in take home pay of around £110 per month. For employers, the switch to an EV is equivalent to giving a pay rise of almost £2,000 per annum.

There are business benefits too because the cost of employers’ NICs on the company car benefit in kind will fall by £912 per annum. If this is multiplied across a large fleet of 100 cars, the savings can be very significant.

Evaluating cash or car schemes

It is fairly common practice for employers to offer employees the choice of a company car or a cash allowance. If they choose an EV as their company vehicle, they can make significant savings compared with taking a cash allowance instead.

For instance, a basic rate taxpayer sees a financial benefit from choosing an EV as a company car compared with funding their vehicle privately through an allowance. The company car route offers a significant saving when compared to a cash allowance.

The business funding the battery electric vehicle company car would save at least 10% when compared to funding the internal combustion engine company car or cash allowance.

Funding an EV through salary sacrifice schemes

Using salary sacrifice to fund electric vehicle arrangements can be beneficial for all parties and also means a much wider number of employees can be offered a company car. In a salary sacrifice scheme, the employee consents to lower gross pay because they sacrifice a portion to finance the EV. In return, the employee can be taxed at a lower rate (because their gross salary is reduced) and they get a fully insured and maintained EV. The employer saves on salary costs and employer’s NICs.

The example demonstrates the financial impact for an employee of taking an electric vehicle via salary sacrifice instead of a traditional car and the benefits over funding the same car privately. Employees can save up to 63% when opting for an electric vehicle via salary sacrifice compared to funding the same car privately.

Consider an EV with a list price of £32,200. Bought through salary sacrifice the net cost per month is £346, compared with £562 for the same car bought privately. If the employee bought a fuel car costing £25,995, this would cost £304 per month through salary sacrifice and £496 per month bought privately.

It’s important to be aware of the Optional Remuneration Arrangement (OpRA) legislation which applies in situations where an employee can choose between taking a company car or cash allowance. OpRA legislation will typically remove tax advantages of salary sacrifice benefit in kind arrangements, but it doesn’t apply to most electric vehicles with emissions of 75g/km or less.

Tax and access to charging facilities

One aspect to consider if you wish to offer EVs as company cars is the charging facilities.  Due to the increased cost of electricity, charging is more expensive for employees and employers. There are different categories of charging:

Residential charging - If an employer pays for a vehicle charging point to be installed at an employee’s home for use with a company car, there is no taxable benefit. Conversely if the charger was used for a private car there would be a taxable benefit. If an employer reimburses the cost of electricity used to charge an electric company car at home, the reimbursement should be taxed as earnings, with the employee being entitled to a deduction for the cost of business miles travelled. The reimbursement for electricity should not trigger an income tax and NICs liability, regardless of whether it is for business or private use.

Public charging - Costs associated with using public charging facilities will be the electricity used and any provider subscription fees. If an employer meets these costs for an employee with a company car, there is no tax liability, but this exemption is only available for company cars.

Workplace charging - No taxable benefits arise from provision of charge points and electricity when company car EVs are charged at the workplace. Private EVs can also be charged tax free at a workplace, provided that the facilities are made available to all relevant employees.

After reviewing the many incentives on offer, there is a strong case for offering EVs as company cars and it could provide a valuable incentive to employees. The high cost of EVs means they are out of reach for many people. In addition, in helping to make the switch, you will also be helping to reduce the carbon footprint of your workforce, which is a very important environmental benefit.

If you would like to calculate the options for offering EVs as company cars, contact us via partners@rjp.co.uk

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