Electric and Hybrid Cars - December 2022 update

This flyer provides an updated summary of the capital allowances and benefits in kind in relation to electric and hybrid cars.

A Capital allowance is a deduction allowed against the profits of a business for the cost of acquiring capital assets. This allowance replaces any depreciation which is charged in the business accounts.

Cars, in general terms, are road vehicles primarily suited to the carriage of passengers. This will normally be obvious, but some care is needed with MPV’s, double cab pick-ups, and off road vehicles as they may be treated as vans or commercial vehicles.

The default position is that electric cars and low emission cars are ‘main rate’ cars. That is, unless they qualify for first year allowances, they are added to the main pool and attract 18% writing down allowance. Low emission cars for this purpose means having a CO2 emission level of less than 50gkm. All other cars will attract a 6% writing down allowance.

New and unused electric cars and zero emission cars attract a 100% first year allowance instead of a writing down allowance. This means that the whole cost of the car is allowed as a deduction against profits in the year of purchase. Hybrid cars which have a petrol or diesel engine do not attract this allowance as they will not have zero emissions. A ‘new’ car includes demonstrators but otherwise cannot be second hand.

Where an employer provides an employee with a car the employee must pay tax on a ‘benefit in kind’. This benefit is calculated based on the original list price of the car and the CO2 emission levels. Cars first registered from 6 April 2020 attract a 2% lower benefit charge than those first registered before. The current rate of benefit for new cars at start at 2% and rises to 41% (including a 4% diesel supplement) depending on the CO2 emissions. Hybrids with an emission level below 50gkm have a lower benefit the higher the electric mileage range.

For example, a new all electric car with a list price of £35,000 attracts a benefit of £700 p.a. If you pay tax at 40% the tax cost is £280 p.a. The employer also pays Class 1A National Insurance at 14.53% (2022/23 annual rate) which equates to £102 in this example.

A separate benefit in kind is charged if the employer provides any fuel for private use. This uses the same percentage as the car above applied to a fixed amount of £25,300. (2022/23 rates). For example, a car with a benefit charge of 13% will attract a fuel benefit of £3,289 p.a. At 40% tax will be £1,316 and employers’ national insurance of £478. Unless private mileage is very high this is an expensive benefit, and it is normally better for the employee to buy their own fuel and the employer to reimburse fuels costs for business mileage.

Electricity is not fuel and does not attract a fuel benefit charge. Where employers provide charging points at a place of work there is no tax charge for employees charging their cars at the employer’s expense.

There is a specific exemption from benefits in kind where an employer pays for the installation of an electric charging point at an employee’s home.

If an employee uses their own electric car for business the employer can reimburse mileage tax free at 8 pence per mile.

Where an employer pays for the cost of electricity at the home of an employee, this is treated as employment income, but the employee can deduct the business mile age at 8 pence per mile.