Tax Incentives for Zero and Low Emission Vehicles

Many individuals and businesses are considering switching to zero and low emission vehicles.

There are significant tax incentives to doing so, in this article I will outline what these incentives are and how individuals and businesses could benefit.

Corporation Tax Capital Allowances

From April 2021, first year capital allowances can be claimed on new zero emission vehicles.

This means that 100% of the cost of a vehicle can be claimed as a capital allowance, reducing a limited companies corporation tax liability.

For example, a company making a profit of £30,000 before corporation tax purchases an EV costing £30,000. A first-year capital allowance of £30,000 is claimed thereby reducing the companies profit to £0 and saving £5,700 in corporation tax (£30,000 x 19%).

In addition, the new corporation tax super deductions of 130% on qualifying capital allowances includes electric charging points for business EVs. This is included as associated expenditure so is deductible from company profits.

Benefit in Kind Calculations

Taxable Benefit in Kind (BIK) is paid by individuals who use a company vehicle for part personal usage.

The BIK amount is added to an individuals taxable income and taxed at PAYE via self-assessment.

BIK on vehicles is determined by the vehicles CO2 emissions, starting at 1% of the vehicle list price for zero emission EVs and increasing to 2% in year two onwards.

For example, on a vehicle costing £30,000 a BIK of just £300 per year (1%) would be added to the director or employees taxable income.

In addition, there is no fuel benefit (BIK) charge on EVs as there are with petrol and diesel vehicles.

For low emissions vehicles the rate with depend on the vehicle but can range from 2% to 14%.

Vehicle Road Tax (VED)

Vehicle Excise Duty (VED) for 100% electric vehicles is £0. This is set to remain in place until at least 2025.

Low emission vehicles incur a lower VED amount that petrol or diesel vehicles.

Salary Sacrifice Schemes on Leased Electric Vehicles

EVs can be leased through a salary sacrifice scheme and taken from an employees or company directors gross pay (before income tax and NI deductions, etc).

This reduces taxable income by the lease amount which results in tax savings for the employee or director so is a good option to consider.

For example, a higher rate taxpayer earning £55,000 per year could set up an EV lease agreement of £417 per month. This would reduce their taxable income to just below £50,000 per year. Their income would therefore fall below the higher rate threshold, saving £2,000 in income tax (40% of £5,000).

Mileage Allowances on Privately Owned Electric Vehicles

Employees that use a privately owned EV for business use can claim up to 45p per mile as a mileage allowance for the first 10,000 and 25p per mile thereafter.

VAT on Electric Vehicles

Electric Vehicles (EVs) are treated in the same way as other vehicles for VAT. Where there is a personal usage element VAT is not recoverable.

If the EV is used only for business, then the full VAT can be recovered. For EVs that are leased, 50% of the VAT charged can be recovered.

VAT incurred when charging an EV at a business or public premises (for business use) can be recovered in full.

VAT can also be recovered by VAT registered sole traders or partnerships that charge an EV at home.

Government Grants on Electric Vehicles

A government grant of up to £1,500 can be claimed when purchased an EV with a purchase price of up to £32,000.

In addition, grants of £2,500 to £5,000 are available for the purchase of EV business vans. The exact grant available will depend on the weight of the van with heavier vans (2,500kg - 3,500kg) eligible for the higher grant of £5,000.

Grants are no longer available for low emission vehicles such as self-charging hybrids.

Summary

There are many incentives available when purchasing an EV either as an employee, sole trader or partnership or via a limited company.

It is a good idea to consult with your accountant when you are considering buying a zero or low emission business vehicle to ensure you are maximising the tax benefits available.