Electric Cars – Plan Ahead

Sarah Bradford outlines the tax incentives available to encourage drivers to ‘go electric’.

As part of the government’s commitment to encourage drivers to drive ultra-low emission cars, a range of tax breaks are available for employers and employees who decide to ‘go electric’.

These incentives take various forms, including a reduction in the tax benefit charge for electric and hybrid company cars from 2020/21, tax exemptions and capital allowances for electric charging points, and the introduction of a new advisory rate for electric cars.

Company cars – electric and hybrid vehicles

Some years ago, the then government tried, unsuccessfully, to use the tax system to persuade employers to offer employees electric company cars, and employees to choose them, by introducing a zero charge for zero emission cars. The zero charge, which applied from 6 April 2010 to 5 April 2015, allowed an employee to enjoy an electric company car tax-free. As there was no taxable benefit, there was no associated Class 1A National Insurance contributions (NICs) for the employer to pay either. However, at that time the technology was not really there to facilitate the widespread take-up of electric company cars, and despite the attractiveness of the policy from a tax perspective, it largely failed in its aim.

Since 6 April 2015, electric cars have been taxed according to the appropriate percentage for cars falling within the 0 to 50g/km emissions band. The appropriate percentage for this band was set at 5% for 2015/16 and has steadily been increased since, being set at 7% for 2016/17, at 9% for 2017/18, and to its current level of 13% for 2018/19. It will further increase to 16% for 2019/20.

However, from 2020/21, choosing an electric company car will once again be attractive from a tax perspective. From that date, new bands are introduced for electric and hybrid cars. The appropriate percentage for electric cars (zero emission cars) will fall to 2%, whereas the appropriate percentage for cars with CO2 emissions in the category 1 to 50g/km will depend on the electric range of the car – with a lower percentage applying to the cars with the greatest electric range. The percentage applying from 2020/21 to cars with emissions of 0 to 50g/km are shown in the table below.

CO₂Emissions	Electric range	Appropriate percentage
0g/km	N/A	2%
1 to 50g/km	130 miles or more	2%
	70 to 129 miles	5%
	40 to 69 miles	8%
	30 to 39 miles	12%
	Less than 30 miles	14%

Example: Electric company car

An employee chooses an electric company car with a list price of £24,000.

For 2018/19, the appropriate percentage is 13% and the cash equivalent of the benefit is £3,120 (i.e. 13% of £24,000). If the employee is a basic rate taxpayer, the tax payable on the benefit of the car is £624; if the employee is a higher rate taxpayer, the tax bill is £1,248. The employer will pay Class 1A NICs of £430.56 (i.e. 13.8% of £3,120) on the benefit.

For 2019/20, the appropriate percentage is 16% and the cash equivalent of the benefit is £3,840. If the employee is a basic rate taxpayer, the tax payable on the benefit of the car is £768 and if the employee is a higher rate taxpayer, the tax payable is £1,536. The employer will pay Class 1A NICs of £529.92.

For 2020/21, the appropriate percentage of a zero emission car drops to 2%, and consequently, the cash equivalent of the benefit is only £480. The tax payable by a basic rate taxpayer on the benefit is £96 and the tax payable by a higher rate taxpayer is £192. The employer will pay Class 1A NICs on the benefit of £66.24.

As a result of the new percentages for electric and ultra-low emission cars, which are being introduced from 2020/21, employees with electric cars will benefit from a significant reduction in their tax bill. As the above example shows, an employee with an electric car with a list price of £24,000 paying tax at the higher rate will pay tax of £1,248 for 2018/19, £1,536 for 2018/19, but only £192 for 2020/21. The employer will also benefit from a corresponding fall in their Class 1A NICs bill.

Fuel for private journeys

HMRC do not regard electricity as a ‘fuel’ for company car tax purposes. Consequently, the employer can meet the cost of electricity for private mileage in a company car without triggering a fuel benefit charge. As there is no tax charge, there are no employer Class 1A NICs to pay either.

Drivers of electric company cars are, therefore, able to enjoy the benefit of tax-free employer-provided ‘fuel’ for private journeys in their company car; something on which their petrol and diesel-driving colleagues suffer a high fuel benefit tax charge.

Meeting the cost of fuel for business journeys

In the event that the employee meets the cost of fuel for business journeys in a company car, the employer can use the advisory fuel rates, published quarterly by HMRC on the Gov.uk website, to reimburse the employees for the cost of that fuel. As long as the amount paid does not exceed the amount payable at the appropriate advisory rate, there is no tax to pay and nothing to report to HMRC.

From 1 September 2018, there is an electric advisory rate of 4p per mile, which employers can pay tax-free to employees who meet the cost of electricity for business miles in a company electric car. If the amount paid exceeds 4p per mile, the profit element is taxable and must be reported to HMRC on the employee’s P11D or payrolled.

By contrast, where an employee uses his or her own electric car for business journeys, the employer can use the authorised mileage allowance payment rates (AMAP) to reimburse the employee. For cars and vans, the rate is 45p per mile for the first 10,000 business miles in the tax year and 25p per mile thereafter. The payments are tax-free as long as the amount paid does not exceed the amount payable at the AMAP rates. Amounts in excess of this are taxable and must be reported to HMRC or payrolled.

Electric charging points

No taxable benefit arises when a company car driver uses an employer-provided charging point to charge his or her vehicle. The exemption is to be extended to the use of a charging point at or near the employee’s place of work by an employee to charge his or her own car, or a car in which the employee is a passenger (so for example, that of a spouse who gives the employee a lift to work).

The exemption will be conditional on the ability to use an employer-provided charging point being available to employees generally. However, where an employee has multiple locations, it will not be necessary to provide charging facilities at all locations – however, this is not explicit in the wording of the provision. The new exemption will apply for 2018/19 and later tax years.

Capital allowances

Cars do not benefit from the annual investment allowance, so as a general rule it is not possible to enjoy an immediate write-off against profit from expenditure on cars. However, 100% first-year allowances are available for expenditure on new cars with CO2 emissions of 50g/km or less. Thus, where an employer buys a new electric (or ultra-low emission) car, the full cost can be deducted in computing profits.

It should be noted, however, that the first year allowance is only available for expenditure on new cars; expenditure on second-hand cars, even electric ones, does not qualify. Where the first year allowance is not available or is not claimed, writing down allowances are available at the main rate of 18%.

Practical Tip:

There are many tax advantages associated from having electric (or hybrid) company cars. Employers should bear this in mind when planning their company car fleets. From a tax and NICs perspective, it pays to ‘go electric’.