Sustainability remains a key issue for governments around the world, and the UK is committed to reducing greenhouse gas emissions and reach net zero emissions by 2050. One of the many measures used to accomplish this will be the increase in electric vehicles on the road. This will help the nation achieve its climate change targets and boost people’s quality of life by improving air quality in big cities.
By changing the way vehicle taxation is done, the UK government hopes to increase the appeal of electric vehicles. As contractors accountants, we’re always on top of the latest legislation and incentives, especially those that help the self-employed, so take a look at how you can benefit from these tax changes.
Why Buy an Electric Car?
Electric cars are becoming increasingly popular options, with many companies and individuals choosing to buy electric instead of fuel-based vehicles. This decision doesn’t come as a surprise once you realise the many benefits of purchasing an electric vehicle, including:
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Less noise when driving, which allows for better focus (this also helps to reduce noise pollution levels, something particularly important in larger cities)
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Cheaper running costs, since you won’t be buying petrol or diesel, which usually increase in price every few months
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Reduced pollution, considering the car doesn’t emit harmful gases into the atmosphere
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Ability to charge the vehicle at home with a charging station, which is extremely convenient for business owners who lead a busy life
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Exemption from the London Congestion Charge if your car is fully electric
Benefit in Kind
If you’re buying an electric vehicle for your business, you should receive a taxable Benefit in Kind and pay tax at your marginal rate on the benefit at 20/40/45%. A benefit in Kind refers to perks that employees get from their job but are not included in their salary, such as company cars. You may have to pay this tax if the company car is used for non-business purposes, such as travelling to and from home.
In essence, company cars are categorised into bands according to their fuel/energy type and CO2 rating. This tax year, fully electric cars will not pay any Benefit in Kind. In the 2021/22 and 2022/23 tax years, drivers will pay 1% and 2%, respectively.
There are also five new bands for plug-in hybrid cars that emit 1g to 50g of CO2/km – this benefits vehicles that can drive the furthest with the lower amount of emissions. For the tax year of 2021/2022, these tax bands will be:
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Taxed at 2% – over 130 miles electric range
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Taxed at 5% – between 70-129 miles electric range
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Taxed at 8% – between 40-69 miles electric range
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Taxed at 12% – between 30-39 miles electric range
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Taxed at 14% – less than 30 miles electric range
While the measures are made to increase the adherence of fully electric vehicles in fleets, self-employed individuals can also benefit from them.
From the 2021/22 tax year, the government will also offer tax changes that will help to cut down electric van tax bills for drivers. Currently, electric vans are still taxed at 80% of the benefit of a fuel-based van.
Claim Capital Allowances
If the car is electric (or new and unused with CO2 emissions lower than 50g/km), you can claim a first-year allowance, which means full corporation tax relief in the year of purchase.
This means you can deduct the full cost of the vehicle from your profits before tax. For cars bought after April 2018, you can claim enhanced capital allowances, which are a type of first-year allowance, for:
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Some vehicles with low CO2 emissions
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Certain motors that are energy-saving and belong to the government’s energy technology product list.
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New zero-emission goods vehicles
National Insurance and Road Tax
When buying a car, whether you own a limited company or are a sole trader, you should also consider National Insurance contributions and road tax.
When it comes to road tax, fully electric vehicles are exempt. This is because the road tax is calculated on the quantity of CO2 emissions that the car produces, and electric cars are zero-emission. However, if the vehicle was registered after April 2017 and costs over £40,000, you will still have to pay a charge of £350 per year for the first 5 years.
Save Money with Electric Vehicles
To summarise, you will probably be able to save money in the long run by opting for an electric car, especially now that the government is changing the way they tax these types of vehicles.
Whether you’re looking for sole trader accountants or limited company accountants, we can help you figure out how much tax you will end up paying. Gorilla Accounting can assist with:
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Corporation tax
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VAT implications
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Calculations based on leases and hire purchases
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Taxable benefits
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Correlation with dividends or salary
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National Insurance figures
So, please don’t hesitate to get in touch today with us on 0330 024 0406 and our expert accountants will be more than happy to chat with you about the tax efficiency of both your vehicle and your business. As our client, you’ll benefit from our FreeAgent accounting software and quick, same-day replies to your urgent questions if you contact us by 3pm.
