Are electric cars still tax-efficient for companies?

Tax policies can be used not only to collect revenue but also to influence and encourage positive behaviour in society. One of the examples is the company car tax rules which tax high emission cars heavier and reward drivers for choosing electric and low emission models to protect the environment.

Why do emissions matter for tax?

In cases where employees have an available company car for their private usage, employees are taxed on the benefits that car provides. The taxable amount is an appropriate percentage of the car and its optional accessories prices. The charge is adjusted to reflect capital gain contributions by the employee which is capped at £5,000, periods when the car was not available and any other payments for the employee’s private use. 

The appropriate percentage mostly depends on the CO2 emissions produced by the car. Vehicles with lower emissions have lower tax charges. For the 2020-2021 and 2021-2022 tax years, the tax charge also depends on whether the car was registered before, on or after 6 April 2020. The reason is the change in the way emissions were measured in cars.

However, the tax rates have been aligned from 6 April 2022. If a car’s emissions fall in 1—50g/km band, the electric range of the car also has a bearing on the emissions, with a lower percentage applying to cars with a greater electric range. The electric range is the distance that can be covered on a single charge. A supplement of 4% applies to diesel cars which do not meet the RDE2 emissions standard. However, the percentage is capped at a 37% rate.

2022 – 2023 and beyond

For the year 2022-2023, the appropriate percentages range from 2% for cars with zero emissions and those with CO2 emissions in the 1—50g/km band with an electric range of more than 130 miles to 37% for cars with CO2 emissions of 160g/km or more. For diesel cars not meeting the RDE standard, the maximum percentage of 37% applies to cars with emissions of 145g/km and above.

It is no longer possible to have tax-free electric cars as in the previous year. However, the charge rate is very low with only 2% of the list price. For example, for an electric company car costing £30,000 the taxable amount is only £600, which will cost a basic rate taxpayer £120 in tax for the year and a higher rate taxpayer £240 in tax for the year. Even with a more expensive car costing £50,000, the taxable amount of £1,000 means that a higher rate taxpayer will only pay £400 of tax for the year. If a fully electric car is not attainable, the same result is achieved with a hybrid with an electric range of 130 miles (and emission in the 1—50g/km band).

The appropriate percentages applying for 2022- 2023 remain unchanged for 2023-2024 and 2024-2025. This means that electric and low efficient cars remain a tax-efficient benefit for the few years ahead. For more information please visit the government website.