Electric cars have been headline news in recent days, with the government’s announcement to delay the ban on petrol and diesel cars; and the subsequent debate that this decision has triggered. 

Nevertheless, recent data from HMRC and various motoring bodies, suggests that the use of electric company cars continues to rise in the U.K., which is not surprising given:

• Employers’ Environmental Social and Governance (ESG) agendas

• The cost of an electric car still being prohibitive for consumer/private market

There’s a lot for employers to consider before making the switch to an electric car fleet - the specific needs of the workforce and individual employees, day to day operational and practical issues, employee communications and of course cost. In this article we focus on the key tax efficiencies available for electric vehicle (EV) company cars, for both employers and employees.

Are EVs the future of company cars, and the answer to getting greener cars on the road? 

As employment tax advisers, we are often asked by employers about the most cost-effective way to structure employee pay and benefits arrangements; and one benefit that has become increasingly popular is the fully electric company car.

Providing electric vehicles as company cars has been attractive for a while now due to the tax and NIC efficiencies; and recent improvements in vehicle performance and charging infrastructure, as well as lower vehicle costs, have added to the appeal.  In addition, an employer’s green credentials and a commitment to a clear ESG agenda, can be a key factor in attracting new employees, research has shown.

What’s more, when combined with an effective salary sacrifice arrangement, the potential tax and NIC efficiencies for the employee and employer can be significant.

Headline incentives for tax and NIC:

• The taxable benefit in kind (BIK) for an EV is much lower than that of diesel, petrol or hybrid cars, resulting in a lower tax charge for employees and lower Class 1A NIC charge for the employer. 

• The appropriate company car percentage rate for EVs is currently 2%, frozen until 5 April 2025.  After that date, increases will be capped at 1% per annum until 2028, meaning that the taxable benefit of an EV will stay comparatively low for the foreseeable future.

• There is no taxable BIK for allowing employees to charge their company car at the employer’s premises, even if the charge is used for private mileage.

• Furthermore, there is no taxable BIK on the cost of installing a charging point in an employee’s home, provided this is for the purpose of charging their company car. 

• Compared with the current cost of petrol and diesel, employers might find the cost of charging an EV is still more cost effective, resulting in reduced costs for both business and private mileage.

• There is no taxable BIK for allowing employees to charge their own private EV at the employer’s premises, providing the charging point is available to all employees.

There’s more…

• Although EVs remain a more expensive option in terms of purchase price, employers can currently claim 100% first year allowances on the cost of a new EV (so the cost of the car is fully deductible in the corporation tax computation in year 1).

• Employers can also claim 100% first year allowances on the cost of installing electric charging equipment on employers’ own premises.

 It remains to be seen if all the current tax incentives will remain in place longer term, given the continuing economic uncertainty and as the use of EVs becomes more common. However, there is undoubtedly an opportunity for employers who may be thinking of restructuring their fleet, or who want to tap into these generous reliefs as well as the ESG benefits that EVs offer.

Other recent developments

On the topic of cars and mileage, HMRC recently confirmed that they do not intend to appeal the Upper Tier Tribunal (‘UTT’) decision in the long-running Laing O'Rourke and Wilmott Dixon tax cases.  The effect of this is the possibility of historic Class 1 NIC reclaims on certain mileage/car allowance payments paid by employers to their employees.  To find out more, please contact a member of our Employment Tax Team.

How can we help?

At Alvarez and Marsal Tax, our Employment Tax team have extensive experience in advising employers on their ongoing employment tax and NIC obligations.

We can offer a range of advice and services to employers on company car matters, including taking advantage of the tax and NIC benefits that EVs offer.  Please contact your usual A&M point of contact or Linda Cameron, Monica Houston, Scott Hutchison, Louise Jenkins or Kathy Lloyd.