What are the tax implications of buying an electric car through my limited company?
Over the last couple of years the Government has made it clear that it wants us to ditch our petrol and diesel cars and switch to electric. One way to encourage us to make that switch to electric has been changes in the tax system – by offering tax breaks. Generous ones too.
Up till a few years ago now Tesla had really been the main choice for many business owners.
BUT. That’s now changed. Jaguar launched the I-Pace and Mercedes the EQ and now pretty much all car manufacturers now offer a range of full electric vehicles or at the very least hybrids.
Having decided that they want to go electric all business owners want to know is….
What is the most tax efficient way to get it?
Practical considerations
When deciding what car to buy the first thing to consider isn’t the amount of tax relief on offer but rather the practical stuff such as…..
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- How many years are you probably wanting to drive this car?
- How many miles do you drive in a year?
- How many long-distance trips do you do (What’s the range of the car and charging points en route?)
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It’s also important to remember that for a car to be treated as an electric car it MUST BE pure electric. Hybrid cars aren’t 100% electric. That means, as far as the taxman is concerned, they DON’T qualify for the tax breaks that electric cars do.
Your Purchasing Options
In truth there are four main ways for the company to buy an electric car.
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- Purchase it out right
- HP
- Lease
- PCP
As you will see below the tax implications for each of these four options are quite different. With both corporation tax and personal tax rates rising in the very near future picking the best option for you is more important than ever.
The Tax Implications
No matter which option you go for there will be several taxes to consider. The question is which option saves the most amount of tax meaning there is more cash left for you.
To try and help you make sense of the tax implications for each of the 4 options I’ll give some figures using a worked example.
Let’s say…
You plan to get a Model 3 Tesla worth approx £50,000 in 2024 and which you will drive for 3 years at which point you’ll get rid of it.
Your business makes pre-tax profit of £300,000 each year and you earn £50,000 – which means any increase in your income will be subject to higher rate tax…….
Let’s look at the four options…..
Option 1 – Buy Out Right
If your company buys the electric car outright then the whole cost will be offset against its’ profits. That means in the year the car is bought the company profits are reduced from £300,000 to £250,000.
1 Tax Savings
In the year of purchase will save corporation bill of £12,500.
And that’s because the corporation tax relief is : £50,000 (the cost of the car) x 25% (the corporation tax rate for the 2023 financial year) = £12,500.
Bear in mind that corporation tax rates were increased from 19% to 25% from 1st April 2023.
2 Tax Payable – Benefit in kind (BIK)
Having a company vehicle is a ‘perk’ for you as an employee. It’s not tax free. There is income tax and national insurance to pay on the benefit in kind (BIK).
At the moment, the BIK rates for electric cars for 2024/25 are currently incredibly low at just 2% of the list price.
Income tax payable (each year) : £1,000 (BIK value) x * 40% (tax rate) = £400
National insurance (each year) : £1,000 (BIK rate) x 13.8% (Employer NIC) = £138
The benefit in kind rates are scheduled to increase at 1% each year until 2027/28 – so 3% for 2025/26, 4% in 2026/27 and 5% in 2027/28. Using a 2% rate on a £50,000 car means the BIK value in 2024/25 of £1,000. The BIK values then rise to £1,500 (3% *£50,000) in 2025/26 and £2,000 (4% *£50,000) in 2026/27.
The total income tax and national insurance payable for the 3 years : £2421
3 Tax Payable – on sale of car
HMRC rules mean your company gets tax relief on the ‘net cost’ of the car. The net cost being the difference between what your company buys the car for and then sells it for.
HMRC’s rules mean your company gets corporation tax relief on the purchase price BUT when the car is sold then the company pays corporation tax on the sale proceeds.
In this example there is corporation tax payable on the £20,000 proceeds in the year of sale.
Corporation tax payable : £20,000 (proceeds) * 25% (corporation tax rate in 2027) = £5,000
Buy Outright Option Cash Summary
To work out the best option for you need to consider everything – the cost of buying, selling and financing the car AS WELL as all the taxes that will saved and paid.
Here is the summary for the buy outright option….
£
Purchase price 50,000
Less sale proceeds -20,000
Less corporation tax saved on purchase -12,500
Add income tax & National insurance 2,421
Add corporation tax repaid on sale 5,000
Net cost of the car over 3 years 24,921
Option 2 – HP
Buying a car on hire purchase (HP) means your company has bought the car. Your company is the owner. The only difference with option 1 is that your company has taken out a loan (HP agreement) to buy it.
The main difference with buying the car outright under option 1 is cashflow. With the HP option, your company will have to pay an initial deposit, and then the balance is payable via monthly instalments spread over 3 years.
1 Tax Savings
The corporation tax savings are exactly the same as for option 1.
Corporation tax saved (in year of purchase) : £12,500.
BUT
Over the 3 years of the agreement the company will pay interest as part of each month’s HP payment. This HP interest is a business cost – on which your company will claim corporation tax relief.
Corporation tax saved (over 3 years) : £3,000 (HP interest) x 25% = £750.
2 Tax Payable – Benefit in kind
This is exactly the same as with option 1.
Total income tax & national insurance payable for 3 years is therefore £2,421
3 Tax Payable – on sale of car
This is exactly the same as for option 1.
Corporation tax payment (in year of sale) : £5,000.
Buy via HP Option Cash Summary
£
Purchase price 50,000
HP Interest paid 3,000
Less sale proceeds -20,000
Less corporation tax saved on purchase – 12,500
Less corporation tax saved on HP interest – 750
Add income tax & National insurance 2,421
Add corporation tax repaid on sale 5,000
Net cost over 3 years 27,171
Option 3 – Lease
When your company leases an electric car it is actually being rented. Your company does not actually own it – the finance company does. In most cases the nature of the lease agreement means that at the end of the 3 years your company simply gives the car back. That’s it.
But key point for tax is that your company never actually owns the car. It’s not an asset of the company. As a result, it’s not shown as an asset in the Balance Sheet of the annual accounts of your company.
Instead, the monthly lease payments made are added up and included in the Profit and loss Account as a cost of your company. That cost then reduces the profit and corporation tax for the year.
Let’s say look at the tax implications and in doing so let’s assume the lease agreement for the car is £3,000+vat deposit followed by 35 monthly payments of £500+vat.
1 Tax Savings – corporation tax
Unlike options 1 and 2 you don’t get tax relief on the purchase price. That’s because you don’t own the car – remember you’re leasing (or renting) it.
As mentioned above you get corporation tax relief for every lease payment you made in the financial year in which they are made.
That means the corporation tax savings are spread over the 3 years of the lease agreement.
Corporation tax saved:
Year 1 : £10,200 (deposit + 11 monthly payment + vat) x 25% (corporation tax rate) = £2,550
Year 2 : £7,200 (12 monthly payment + vat) x 25% (future corporation tax rate) = £1,800
Year 3 : £7,200 (12 monthly payment + vat) x 25% (future corporation tax rate) = £1,800
2 Tax Savings – VAT
Since the car is being leased your company can also reclaim 50% of the VAT which is charged as part of the monthly lease payment.
The lease cost and the VAT to be reclaimed would be included in the quarterly VAT return just like any other business cost.
VAT to be claimed : £24,600 (total of deposit & 35 instalments paid) X 1/6 (VAT element of the payments) x 50% (the % that can be reclaimed) = £2,050.
3 Tax Payable – Benefit in kind
This is exactly the same as with option 1 and 2.
Total income tax & national insurance payable for 3 years is therefore £2,421
Lease Option Cash Summary
£
Initial Deposit (incl VAT) 3,600
35 monthly payments (incl VAT) 21,000
Less Corporation tax on lease payments – 6,150
Less 50% VAT reclaimed on lease payments – 1,800
Add income tax & National insurance 2,421
Net cost over 3 years 19,071
Option 4 – Buy it yourself
The last of the 4 main options is to buy the car yourself. You personally would pay for it and therefore you would own it.
Over the course of the year some of the mileage done would be for business – for example visiting customers.
To work out the possible tax implications of this option let’s say you did 5,000 business miles a year.
1 Tax saving – mileage claim
Since you are using your own car for business you are entitled to submit an expense claim for the business miles done. Any claim would use the current mileage rate of 45p and would be applied to the number of business miles done.
Using 5,000 miles your mileage claim would therefore be worth £2,250. This claim would be cost to the company thus saving it corporation tax. You too would save tax as you would be entitled to take £2,250 from your company by way of repayment of expenses rather than via dividends which would be taxed.
Corporation tax saved : £2,250 (expense claim) x 3 (3 years of ownership) X 25% (corporation tax rate) = £1,687
Dividend tax saved : £2,250 (expense claim) x 3 (3 years of ownership) X 33.75% (dividend tax rate) = £2,278
2 Dividend Tax paid
BUT to buy the car in the first place you would need to have £50,000.
Almost certainly this money would have come from your company. Almost certainly this would have come by way of a £50,000 dividend.
That means higher rate dividend tax would need to be paid on this £50,000 dividend.
Dividend tax payable : £50,000 (dividend) / 0.6625 (this is to gross up for the new higher rate dividend tax) = £75,472 less the original 50,000 = £25,472
Buy Yourself Option Cash Summary
Purchase price 50,000
Less sale proceeds -20,000
Less mileage expense claims (for 3 years) – 6,750
Less corporation tax saved on mileage claim – 1,687
Less dividend tax saved on mileage claim – 2,278
Add dividend tax on dividend for purchase 25,472
Net cost over 3 years 44,757
SO IN SUMMARY
As you can see the illustrative figures show there are BIG differences in the ‘net cost over 3 years’ for each of the four options. The situation is made further complicated by the fact that both company and personal tax rates are set to rise in the near future.
This article reflect the tax increases which have already been announced but bear in mind further changes are likely to be announced over the next 3 years. So ensure you use this for illustrative purposes and compute the figures carefully with your advisers before committing to any purchase!
It would also make sense to factor in other costs, such as insurance, possible repairs, etc. If these costs were paid by the company (rather than you personally) then there maybe extra corporation tax savings for your company.
One final thought.
To avoid you wasting money by paying too much tax it is imperative that you need to know which is going to be the best option for you.
To pick the best option I recommend that you prepare detailed calculations for your electric car for each of four options listed above. The illustrated examples above should help.
PS
If you have a friend who is thinking about buying an electric car then please share this article ASAP – it may mean they don’t miss out on tax savings worth thousands.
