The Benefits of Electric Cars: A Tax-Friendly Choice for Employers and Employees

Electric cars are increasingly popular, not just for their environmental benefits, but also for their financial perks. Both employers and employees stand to gain from choosing an electric vehicle (EV) over traditional petrol or diesel cars, thanks to significant tax incentives. In this blog, we’ll explore the benefits of electric cars and break down the tax implications.

Why consider an EV?

There are both environmental and financial benefits to choosing an EV:

• Environmental Impact: EVs produce zero tailpipe emissions, which means they significantly reduce air pollution, helping to combat climate change. For companies, adopting EVs aligns with corporate social responsibility (CSR) goals and demonstrates a commitment to sustainability.

• Lower Running Costs: Electric cars are cheaper to run than petrol or diesel vehicles. They have fewer moving parts, leading to lower maintenance costs. Electricity is also cheaper than fuel, reducing day-to-day running costs.

• Government Incentives: The UK government offers various incentives to promote the use of electric cars, including grants for EV purchases and the installation of charging points.

• Tax Benefits: Both employers and employees can benefit from substantial tax savings through reduced Benefit-in-Kind (BIK) tax rates, National Insurance Contributions (NICs), and Corporation Tax reliefs.

The tax implications of an EV

Employer costs

The main costs to the employer include:

• Class 1A on any benefit-in-kind

• Monthly lease cost (although the company is typically able to reclaim 50% of the VAT on the lease cost)

Employee costs

The main costs to the employee include:

• Income tax paid on the value of the taxable benefit

The amount of any costs or available tax savings depends completely on the method by which the car is made available to the employee; whether it is in addition to their annual salary, through salary sacrifice, or if the car is leased to the employee.

Tax Implications: Worked Examples

In the worked examples below, we consider an EV with a list price of £50,000 leased at £500 plus VAT per month.

Scenario 1: car available as an addition to gross salary

Tax Implications for the employer:

• National Insurance Contributions (NICs)

Employers must pay Class 1A NICs on the BIK provided to employees. The NIC rate for 2024/25 is 13.8%, so the annual NIC liability for the employer is:

£1,000 x 13.8% = £138

This cost is also lower compared to traditional cars with higher BIK rates.

• Lease Costs and VAT

The monthly lease cost is £500 plus VAT (£600 including VAT).

Employers can reclaim 50% of the VAT on the lease payments for company cars, reducing the effective lease cost to:

£500 + (£100 VAT × 50%) = £550 per month

The annual lease cost is therefore £6,600 (12 x £550).

• Capital Allowances and Corporation Tax Relief

Although leased cars do not qualify for capital allowances, the lease payments are fully deductible from the company’s taxable profits, further reducing the Corporation Tax liability.

Tax Implications for the employee:

• Benefit-in-Kind (BIK)

The BIK rate for electric cars in the 2024/25 tax year is 2%. This means the taxable benefit is calculated as:

£50,000 x 2% = £1,000 per year

For an employee paying income tax at the higher rate of 40%, the annual BIK tax liability would be:

£1,000 x 40% = £400

This is significantly lower than the BIK tax for a petrol or diesel car with the same list price, which could be as high as 30%, leading to a much higher tax bill.

Scenario 2: car available through salary sacrifice

Salary sacrifice allows employees to give up a portion of their pre-tax salary in exchange for a non-cash benefit, such as the use of a company car.

Tax Implications for the employer:

• National Insurance Contributions (NICs)

  Employers save on NICs based on the salary sacrifice amount:

£7,200 × 13.8% = £993.60 per year

• Lease Costs and VAT

  Monthly lease cost: £500 + VAT = £600

Employers can still reclaim 50% of the VAT on the lease payments, lowering the effective cost of leasing.

• Net Savings for Employer

  £993.60 (NIC savings) + VAT recovery and deductible lease costs, improving the overall financial efficiency for the company.

Tax Implications for the employee:

• Income Tax and National Insurance Contributions (NICs) Savings

If the employee opts to sacrifice £600 of their gross monthly salary, the taxable income is reduced by £7,200 annually (£600 × 12 months).

For an employee in the 40% tax bracket:

• • Income Tax Savings: £7,200 × 40% = £2,880 per year

  • NIC Savings: £7,200 × 2% (assuming NIC rate for higher earners) = £144 per year

Total employee tax savings per year = £2,880 (income tax) + £144 (NIC) = £3,024

• Benefit-in-Kind (BIK)

  Despite the salary sacrifice, the employee is still subject to BIK tax on the electric car:

  • BIK Value: £50,000 × 2% = £1,000 per year

  • BIK Tax: £1,000 × 40% = £400 per year

• Net Savings for Employee

  £3,024 (salary sacrifice tax savings) - £400 (BIK tax) = £2,624 per year in net tax savings.

Summary

Switching to electric cars offers significant tax advantages for both employers and employees. With lower BIK tax rates, reduced NICs, and the ability to reclaim VAT on lease payments, electric cars can lead to substantial financial savings while promoting environmental sustainability. The examples above demonstrates how choosing an EV can be a smart financial decision for both the employer and the employee, making the transition to electric vehicles a win-win situation.

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The details in this post are based on rates correct at the date of posting, and the content of this post should not be taken as a substitute for seeking professional and legal advice.