A lot of people are thinking about buying electric cars through their limited company so here is the run down of how it works and the key things to consider.
You don’t have to run out and sell your car and buy a snazzy electric vehicle. If you have a car you own personally that you use for business mileage make sure you are claiming the mileage! This is advice for both Sole Traders and Limited Companies. You get 45p per mile mileage allowance up to 10,000 miles, make sure if you’re doing the miles you’re tracking them. Don’t miss out on that tax relief.
BUT, if you’re in the market for a new car and are pondering how your limited company can make it more appealing do read on. (Please read on regardless, or we’ll be upset that only 4 of you have read this.)
Aside from saving the planet, the laughable fuel prices and feeling like a superior being, electric cars have nicer tax rates.
The benefit in kind taxes on standard cars through Limited Companies are horrible. They aren’t worth getting involved with and you’re better off owning it personally and claiming the 45p mileage allowance. Should I bother with a company car? Often, no.
But, it all changes with electric vehicles.
With electric vehicles you can claim 100% capital allowances on the purchase of the car. This means your profit will be reduced down in the year you buy the car and you’ll pay less corporation tax. Lovely. (The car has to be fully electric and brand new to be able to claim the 100% capital allowance in the first year).
If you prefer to lease the car, rather than buy it – the expense goes to your profit and loss account and is fully allowed against corporation tax.
To reclaim the VAT on any car purchase outright, it needs to be used exclusively for business. However, if you lease the car instead you would be able to reclaim 50% of the VAT from the lease payments, even where there is some personal use. Where the leased electric car is exclusively used for business, 100% of the VAT can be reclaimed.
Remember for HMRC purposes your usual commute between home and office is counted as personal rather than business travel.
If you’re using the car for personal use, which you likely will be, there will be a benefit in kind tax due. From March 2022 the benefit in kind percentage is 2% on electric vehicles, for most petrol vehicles it is about 37%.
To calculate how much tax the company will pay for providing an electric car to an employee as a BIK, you will need to use the formula:
P11D value (the value of the electric car) x BIK rate based on CO2 (2% as set out by the government) x 13.8% (the rate of Class 1A National Insurance contribution payable by employers).
Using an example of a car worth £50,000, the company would calculate 2% of this value (£1,000) and multiply it by 13.8%. The company would pay £138 Class 1A NIC every year the car is available as a BIK to the employee.
To calculate how much tax the employee will pay on the vehicle, you will need to use the formula:
P11D value (the value of the electric car) x BIK rate based on CO2 (2% as set out by the government) x employee’s income tax rate
For the same car worth £50,000 the maths works out as:
Basic rate at 20% would pay £200 tax each year
Higher rate at 40% would pay £400 tax each year
When you factor in the fact that the company will be paying for the car, insurance and maintenance, it suddenly becomes quite appealing. Especially as you would be paying tax on the money you withdraw from the company to pay for those bits personally.
As with everything, this is a broad overview to give you an idea of how it all works. Always double check the maths for your individual circumstances before you make any decisions, especially when it comes to buying a new car!
If you do go and treat yourself to something wonderfully snazzy, please don’t tell us, we’ll be horribly jealous.
As always, questions, queries, comments, you know where we are!