Company car tax – Why it might pay to go electric

8 July 2020

For owners of small businesses, taking out a company car is often a false economy – often creating more personal tax liability than it saves on the company’s corporation tax bill.

A company car is treated as a ‘Benefit in Kind’, and therefore Income tax is charged to reflect the monetary value of the perk. The monetary value is based on how environmentally friendly your vehicle is, the greener the vehicle the cheaper the tax.

In the past it has been beneficial to buy the car in your personal name and claim mileage allowance from the company instead. A rapid rise in hybrid and fully electric cars is now changing this advice.

Due to their lower emissions, hybrid and electric company cars are taxed at a reduced Benefit In Kind rate (Bik rate) – a move designed to encourage drivers to choose cars that produce lower levels of CO2 and NOx.

In this current tax year (2020-21), the cleanest vehicles on the market will carry a BiK rate of zero% – compared to 37% at the opposite end of the emissions scale.

Added to this, there is currently a 100% first-year allowance (FYA) available to all businesses purchasing ultra-low emission vehicles – effectively giving full tax relief on the cost of the car in the year of its purchase.

With these huge tax breaks for both business and driver, plus numerous other benefits of ‘going green’ (including reduced road tax, congestion charge exemption and a Plug-in Grant of up to £4,500), it’s not hard to see why small business owners should be steering towards an electric car.