Buying an electric car through my limited company

Feb 22, 2023

Updated on: Apr 8, 2024

Buying a car through your limited company can be complex, and result in more tax bills, than savings, especially if the vehicle is not used for business, or has limited business use.

However, as the government is trying to encourage the UK to go green, there is an opportunity to buy fully electric, zero emission vehicles and get substantial tax benefits that are not available to petrol and diesel cars. For example, you can use capital allowances to lower your corporation tax bill, and there are grants for installing a charging point for the vehicle on your business premises called the Workplace Charging Scheme.

Another great (and tax efficient) option is to consider using the cycle to work scheme to get to work and stay healthy.

While there are advantages, there are also disadvantages in buying an electric car through your limited company and a lot will depend on your circumstances and how it is used. Despite the grants and incentives available, bear in mind that electric vehicles can still end up being more expensive in the short term, as the higher capital costs of purchasing an electric car take a number of years to be “paid off” in terms of fuel savings.

If you are looking to buy a new Tesla through your company our guide will help you understand all the real-world tax impacts.

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Issues to consider when buying an electric car

It is critical to know the following information about the vehicle prior to purchasing to ensure you can accurately determine the tax impact of buying the car through your limited company.

  • The CO2 rating.
  • The stated electric range according to Vehicle Certification Agency (needed if the vehicle has CO2 emissions between 1-50g/km)
  • The FULL retail price of the car including any extras.

The above factors play a part in deciding on whether the purchase is worthwhile or not from a tax perspective. In our view only zero emissions vehicles are worthwhile if there is a private use component to the car you are purchasing.

If you wanted to run some taxation scenarios for various car purchase options, you can use the HMRC Company Car and Fuel Benefit Calculator.

Business vs personal use

If you are solely using it for business purposes, you can reclaim the VAT and off-set the purchase price against corporation tax making significant savings.

If you buy an electric car through your business but intend to keep it for personal use only, it will be considered a benefit in kind and will be subject to tax as if it were income. 

For most, there will be a portion of both business and personal use, giving a corporation tax saving to the company and a benefit in kind charge to the individual – fortunately this benefit in kind charge is relatively low for electric cars. 

New vs second hand

If you purchase a brand new (strictly first registered owner only) fully electric car through your limited company, you can claim a First Year Allowance of 100% against your corporation tax bill. The vehicle must be fully electric with CO2 emissions of 0g/km.

This is incredibly attractive from a tax perspective as the full cost of the car can be used to reduce your corporation tax liability.

Purchasing a second-hand fully electric vehicle through the company can still be beneficial as capital allowance are still available but at a lower rate of 18% per year.

This reduced rate of 18% also applies to new or second-hand cars with CO2 emissions of 50g/km or less.

For full details on how capital allowances are calculated for business cars, see the HMRC help guide on claiming capital allowances.

The capital allowance can be claimed if the vehicle is purchased outright by the company, or via a hire purchase agreement but not if the vehicle is leased under an agreement whereby the company doesn’t actually own the vehicle. 

If the vehicle is obtained under a Hire Purchase agreement, the company will not only benefit from the 100% first year allowance but there will also be a corporation tax savings on the interest on the monthly payments.

If the vehicle is leased by the Company, the monthly rentals will be included in the profit and loss account as an expense, which reduces the company’s profit and corporation tax for the year.

UK Plug-in Car Grant

In March 2021, the Government confirmed a UK Plug-in Car Grant. This scheme works by giving manufacturers and distributors a grant for low emissions vehicles which translates into a discount for you when purchasing the vehicle. Make sure you ask the seller whether they have taken this into consideration in the price they are offering you.

The discount you can get depends on the type of vehicle. The types of eligible vehicles are: wheelchair accessible vehicles, motorcycles and mopeds, small and large vans, small and large trucks, taxis.

Our guide Buying an electric car through my limited company looks at the tax pros and cons of buying a company car

Corporation Tax

The corporation tax for the company in the year of purchase, will be reduced in line with the capital allowance that can be claimed. For example, if you buy a brand new fully electric car for £35,000, and your business company tax rate is 19%, then the company tax for the accounting year will be reduced by 35,000 x 0.19 = £6,650.

The company will also be able to get corporation tax relief on the costs of maintaining and insuring the vehicle.

Also keep in mind that if or when the car is sold, its sale will be treated as taxable income for the business and so will be chargeable to corporation tax.

VAT treatment on the purchase

To reclaim the full VAT on any car, it needs to be used exclusively for business (such as a pool car. Just briefly a pool car is a company vehicle that is available for use by multiple employees of that company. It is usually left in the company’s car park for use for company business by whoever needs it).  Remember that your usual commute between home and office is counted as personal travel rather than business use, so if you use your company car to drive between home and work then the car is not being used exclusively for business.

For a company owned car that is used for a mix of personal and business journeys then none of the VAT can be reclaimed. This also means though that your business will not need to charge VAT when is sells a company car.

If you lease a company car then you will normally be charged VAT on the monthly lease payments, and you can recover 50% of the VAT charged where the company car has mixed personal/business use. As you would expect, where the car is used exclusively for business (such as a pool car) you can recover 100% of the VAT.

Employers National Insurance

Whatever the Benefit in Kind (BiK) value is for the employee, there is an Employers NI charge of 13.8% per annum.

What does the company need to do to comply?

The company will have some statutory requirements to complete annually.

  • P46(car), informing HMRC that a car is provided to employee for private use.
  • P11D, issued to employee for their self-assessment return to report the benefit in kind.

Tax for the Employee

Benefit in Kind (BiK) rates are shown in the table below. These percentages are applied to the full retail value of the vehicle including all extras you may have fitted.

The rates below cover vehicle CO2 emissions from 0 to 54 g/km. For the full list of rates see HMRC Petrol powered and hybrid powered cars for the tax year 2022 to 2023.

 A fully electric car with zero emissions and a retail price of £30,000 would therefore have a BiK of £600 in the 2022/23 tax year.

This figure would then be added to your total taxable earnings and will have tax charged at the relevant rate, which is determined by the level of your total earnings. This calculation will be completed within your personal tax return each year.

So, if you are within the basic rate band your tax payable for 2022/23 would be £120 (£600 x 20%).

A worked example

Car purchased in personal capacity; business use is expensed back to company.

Tom buys a car in his personal capacity costing him £25,000 of his after-tax money (paid for from his savings). He uses the car for business travel and drives 1,000 business miles in the year.

He can claim 45p for the business mileage he drove in the year. Using this HMRC approved mileage rate he can claim back £450 from his business to reimburse him for those mileage costs.

The personal expense to Tom has been the upfront car cost of £25,000 less the £450 he has claimed back from his company, leaving him with having spent £24,550 of his after-tax money. This option also only saves his company £85.50 in corporation tax (£450 * 19%).

Because the car is owned by Tom, there are no benefit in kind (BiK) charges and no P11D issues to consider making this form of ownership very simple to manage. When considering this scenario you also need to look at the amount of tax Tom paid on his salary/dividends to get a net of £25,000 he needed to buy the car in the first place. In a simplistic scenario the total tax paid (assuming he is a basic rate tax payer) is the PAYE on the salary that was taxed to get him the £25,000 amount needed to purchase the car, less the company tax saving and employer national insurance and would be around £8,364.50 (note the actual calculation is a bit more complex than this and is dependent on how Tom receive income from his business).

Car purchased through the company (company is not VAT registered):

Super Ltd purchases through the company a fully electric car costing £25,000 with zero CO2 emissions.

(a) The company saves claims the full purchase cost as a capital allowance reducing corporation tax by £4,750 (19%*25,000).

Sarah uses the car personally and therefore receives a benefit in kind (BiK) which will be taxable. She is a basic rate taxpayer for the year in question. Because of the vehicle is fully electric (zero CO2 emissions), for the 2022-23 tax year the vehicle would incur a 2% benefit in kind (BiK) rate to Sarah.

(b) Sarah’s BiK is £500 = £25,000 * 2%

Because she is a basic rate taxpayer, she will pay 20% personal income tax on the £500 Benefit in Kind.

(c) Sarah will face a personal tax liability of £100 (20% * 500)

(d) The company pays employers NI of £69 (13.8% * 500)

So overall for the company, it has spent £25,000 to purchase the car, plus it will pay employers NI of £69, while also enjoying company tax savings of £4,763 ((25,000 + 69) * 19%), so the overall cost of the business in year 1 is 25,000 + 69 – 4,763 = 20,306.

The car purchase “costs” Sarah £100 in tax in year 1.

In this case you can see how beneficial it can be for your company to buy an electric car. While the taxable benefits remain low, and 100% capital allowances remain in place, it will continue to be an attractive option for limited company contractors.

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