Electric car tax

How much tax can you expect to pay on electric cars?

By Published On: 12 July 2023

Electric cars were once a thing of the future, and it was rare to see one out and about on our roads. But now, more and more people are purchasing them, with charging points being the norm in supermarket and office car parks, and even in people’s driveways. And with Government targets of all cars to be electric or hybrid by 2030, and 100% electric by 2035, soon fuel based vehicles will be a thing of the past. So if you’re tempted to go electric now, how much tax can you expect to pay?

In this blog we take a look at the tax rates on electric vs fuel, and which could be the right choice for you right now.

Company cars

Having a company car was once an enviable perk available to those who ran their own Limited Company, but gradually over time the increase in tax and perceived extra work associated with a company car has begun to put people off the idea. But with the recent tax changes for electric cars from HMRC, if the idea of going electric was once a dream, it could soon become a reality.

Electric cars

To help the government reach its net zero target by 2050, the government has reduced the Benefits in Kind (BiK) tax rate for electric company cars to 2% for tax years 2023/24, and 2024/25. It’s then set to increase by 1% in the following years, so 3% in 2025/26, 4% in 2026/27, etc). Whilst this steady increase may seem like a lot to some, it’s still a far cry from the BiK of 25% that could come with owning a petrol or diesel car.

So currently only 2% of your electric car’s list price is taxable for the next two financial years.

How much could it cost you?

Currently company car tax is split between what an employer pays, and what is paid as an employee. For example, if a company were to purchase an electric car valued at £40,000, an employee can expect to pay a BiK of £800 which is the taxable amount. The total amount of the £800 an employee would pay is then based on which income tax bracket their salary falls into. So say they were a basic rate tax rate payer at 20%, they’d only therefore pay 20% of the £800, which is £160 per year. If they were a higher rate tax payer at 40%, they’d therefore pay 40% of £800, which is £320 per year.

The business will also need to pay National Insurance Contributions (NICs). If any doubt on how much an electric car will cost, get in touch with your appointed accountant, who will be able to put together an illustration for you.

Petrol vs electric – a comparison

So how does a petrol car compare to an electric car, and are you really making that much of a saving? If we were to use the same example of a £40,000 car and the higher income tax bracket of 40%, and the petrol car emits 130 grams per kilometre of carbon dioxide, the car would fall within the 31% BiK rate for the current financial year. So 31% of £40,000 is £12,400, and 40% of that would be £4,960. So compare this amount with the annual BiK cost of £320 for an electric car, an employee would be saving over £4,500 a month, which is a huge amount!

How much tax can you expect to pay on a hybrid?

It all depends on how far a hybrid can travel using its battery, rather than fuel. Conventional hybrids which can’t be charged via a plug traditionally can only travel less than a mile in electric mode, which means on average they’re emitting more than 50g per kilometre of CO2, so they’re usually treated in the same ways in which a petrol of diesel car would by the taxman.

Plug-in hybrids (PHEVs) tend to on average emit less than 50g per kilometre of CO2, and therefore cover a much greater distance using only their battery for power. The further a PHEV can travel on battery power, the lower its BiK rate will be. For example, if you were to assume all PHEVs emit less than 50g per kilometre of CO2, the rates would be as follows if the PHEV is able to travel:

  • Less than 30 miles in battery mode – 14% BiK rate for the next 3 financial years
  • Between 30-39 miles in battery mode – 12% BiK rate for the next 3 financial years
  • Between 40-69 miles in battery mode – 8% BiK rate for the next 3 financial years
  • Between 70-129 miles in battery mode – 5% BiK rate for the next 3 financial years
  • Over 130 miles in battery mode – 2% BiK rate for the next 3 financial years, and will effectively be treated the same as a 100% electric vehicle

So which is the best option for you?

It completely depends on your personal preference, how many miles you’ll be doing, and if you live in an area where charging points are currently few and far between. If you feel you’re not 100% confident on relying on electric, then a hybrid might be the best option for you now, then as more charging points crop up you may be tempted to go completely electric in the future. By 2030 when the ban of petrol and diesel cars comes into play charging points will be everywhere, but until then you may want to err on the side of caution.

Are there any other savings?

Corporation Tax

A low emissions car can mean a company can save Corporation Tax also. For some low emission cars there’s a 100% first year allowance, which means it’s able to put the cost of a car’s purchase towards reducing the Limited Company’s profits and therefore save on Corporation Tax. If you lease a car you’re also able to use the lease payments to offset the company’s profits, and therefore also reduce the Corporation Tax liability.

Road tax

Electric cars currently are exempt from paying road tax, which is also a bonus. From 2025 they will however be treated the same as petrol cars, and the road tax will be the same amount for all car types.

Financially how could you be affected?

Everyone’s circumstances are different, and when it comes to buying a car it’s usually a large amount of money to part with. So before doing so, why not get in touch with your trusted accountant here at Aardvark Accounting, who will be able to offer their specialist advice and support on which type is financially best for you, and help you to make your decision.

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