Originally posted on: 26 February 2023
Updated on: 22 December 2025
In our previous blog post Buying an electric car through my limited company, I looked at several of the main issues to consider when buying an electric car, focusing on the main issues; business versus personal use, buying a new electric car versus buying second hand electric cars, and the impacts on corporation tax, VAT, National Insurance, and PAYE.
Now I would like to take you through a real-world example that reflects how our clients will commonly purchase electric cars through their business. I will use the most common scenario where a client uses retained funds within their business to buy an electric car and will look at the tax benefits achieved. If you are looking into buying a Tesla company car this year, then you have come to the right place!
A lot of our clients who buy an electric car through their business do not buy a Tesla, but I have used this example below since Tesla is the most popular electric car brand in the UK currently. Purchase values, and tax calculations, are all based on current figures as at today 27 Feb 2023.
Keep in mind this article only looks at the tax impacts of buying a brand-new electric vehicle and does not consider the tax impacts of buying petrol and diesel cars at all. Leasing an electric car is covered in this article.
The Scenario
Jill is an engineering contractor who has been working through her own limited company for several years now. Her usual contract rate is around £300 per day, and she has built up a cash surplus in her business over the years of £50,000.
Recently her car got caught in a localised flood and was written off by her insurance company, so she is in the market for a new car. Her old car was owned by her personally, and she does not really use a car for business related travel.
She most often catches the train to her client’s premises, or she works from home. She is the sole director and shareholder of her company, the company is VAT registered, and she uses the No Worries Club Gold service which meets all her accounting needs.
She has decided to purchase a brand-new Model 3 Tesla standard model, along with enhanced autopilot, so her purchase costs will be £45,400 plus a Destination & doc fee of £935, and a first registration fee of £55. For our accounting purposes we will include the Destination & doc fee in the purchase cost of the asset, while the registration fee will be a running cost for the business.
So we have a total asset purchase cost of £46,335 incl VAT.
Purchase of the Electric Car
Jill needs to ensure the purchase of the Tesla is made in the name of her company. Her company is the legal owner of the vehicle and will be shown in the registration documents. When buying a car through your company for the first time this may feel a bit strange as you are not the legal owner of the car. The purchase documents are easy enough to complete however and as the director of her own company, Jill will sign the purchase documents on behalf of her company.
Because Jill already has sufficient retained earnings in her business, the company is able to pay for the new Tesla in one lump sum.
In some cases, clients will not have a sufficient amount of retained funds in their business, in which case they can simply loan the company money from their personal savings to enable the purchase to take place. Then over the course of the next few months where the client would normally pay themselves dividends these payments can now be used to pay back the loan that was made. Loan repayments made by the business to the director/shareholder are not taxable earnings on the individual so it’s a nice way to tax efficiently fund the purchase of a company owned vehicle.
Considering VAT
The purchase price for the new Tesla of £46,335 includes £7,722.50 in VAT. It would be nice for Jill to add the asset purchase into her next VAT return and reclaim this substantial amount of VAT, however she can’t. Where a company owned car is used for a mix of personal and business journeys (or used entirely for personal journeys) no VAT can be reclaimed. The full cost of VAT can only be claimed where the company owned car is a pool car. There are very specific conditions around what a pool car is, and across our entire client base not a single client has a company car that would qualify as a pool car.
On this basis it’s safe to conclude that for most (if not all) limited company contractors, VAT on the purchase cost of company cars cannot be reclaimed.
Looking at Corporation Tax
Corporation tax relief when buying brand new battery electric vehicles through your business is extremely attractive. The full purchase cost of the vehicle is tax deductible in the year of purchase and a brand-new fully electric company car are the only vehicle type you can purchase in the UK where enhanced capital allowances (a type of 100% first year allowance) is available.
This is a very significant factor when considering purchasing a vehicle through your business.
In a typical year Jills company has income of £65,000 per year, with £12,000 of expenses (including her salary) so her taxable profit each year is £53,000. If we assume a corporation tax rate of 19%, then her annual corporation tax liability will be £10,070 per year.
In the year that the Tesla is purchased, because 100% of the capital cost is tax deductible, the taxable profit for her business reduces from £53,000 to £6,665, which in turn reduces the corporation tax to £1,266. So, purchasing the Tesla through her business has saved £8,804 in corporation tax.
Car Benefit Charge
The next thing we need to do is calculate the taxable value of the Tesla. The taxable value is not the same as its purchase cost and its value depends on the car’s fuel type, level of CO2 emissions, and the amount of time the car is unavailable during the tax year.
In Jill’s case we know the Tesla is a fully electric car with zero CO2 emissions, and this means its taxable value is very low. We’ll also assume it is available for her use 100% of the time. Using the published percentage benefit rates from the HMRC we know that the taxable value of this Tesla will be 2% of its purchase cost. This means the taxable value is 46,335 x 2% = £926.
Employers NIC on the Tesla
Because Jill has purchased a new Tesla through her limited company a new type of tax must now be paid called employers NIC. This tax is calculated through the P11D and uses the car benefit charge that we calculated above.
Employers NIC tax rate is currently 13.8%. This is a tax on the company and not on the individual, and in this case the employers NIC due per year will be 926 x 13.8% = £127.79. Note that while the employers NIC allowance can be used to reduce the employers NIC cost, this does not apply to P11D taxable benefits.
Employee Income tax
As with most other company car drivers, Jill must also start paying PAYE on the taxable value of the Tesla. This is also calculated through the P11D, and the value of the taxable benefit will be reported on Jills personal tax return each year. This is where the PAYE liability is reported, and Jill will pay this extra tax along with her usual personal tax payments due to receiving dividends through her business.
The amount of tax Jill will pay because of the Tesla depends on the earnings band she is in. If we assume she takes most of her available dividends every year then she is likely to be a higher rate taxpayer paying 40% tax on earning over £50,270 per year.
In this case we take the same taxable value calculated above and multiply it by her highest tax band rate of 40%. So, she will face an extra 926 x 40% = £370.40 per year in personal tax resulting from her company suppling her with a Tesla.
Summary of Tax Position
In buying a brand-new Tesla through her company Jill has saved her company £8,804 in corporation tax. She is also created a new tax liability for her business with employers NIC of £127.79 per year, and she has increased her personal tax liability by £370.40 per year.
From a cash flow perspective it has been very advantageous for Jill because she is not needed to use any personal savings to buy a Tesla and her company already had all the money required to make the purchase in full.
She has saved her company a significant amount in corporation tax which is immediately recognised in the year of purchase. Although she has also created ongoing tax liabilities now with employers NIC and an increase in her personal tax, these are minor when compared to the corporation tax savings she has achieved along with getting a brand-new Tesla without having to spend a single penny of her own savings.
Charging the Tesla
Jill can also get her company to pay for a charging point at her house. This is a tax-deductible cost for her business, and there is no benefit in kind (P11D) tax related to this. Qualifying expenditure includes the charging point, alteration of land for installing the charging point, and it can include for any modification costs to supply electricity to the charging point. So another win for Jill.
In the scenario we calculated above we assumed that Jill paid for all of the electricity used to charge the Tesla. In this case because Jill hardly uses the Tesla for any business-related journeys it makes things easy from a record keeping perspective and any tax savings Jill could make by getting her company to pay for electricity costs related to business travel would be outweighed by the extra admin required on her part to account for this correctly.
Ongoing repairs and maintenance costs
Further to this because the Tesla is owned by Jill’s company, it must pay for any ongoing repairs and maintenance costs related to the vehicle. These costs are fully tax deductible for her company and this is another win for Jill because she doesn’t need to use after tax earnings to pay for these things.
Selling the Tesla
If after a few years Jill decides to sell her Tesla 3 to make room for a new Cyber truck, this sale will be treated as taxable income for her business, and it means that some of the corporation tax savings she enjoyed in the year of purchase will be reversed (because her company’s taxable income for the year will increase by the sale value of the Tesla).
Also, she was not able to reclaim VAT when the Tesla was purchased, so she will also not need to account for any VAT on its sale. From a VAT perspective this keeps things nice and simple.