hidden-tax-benefits-for-electric-business-cars-despite-new-ved-charges

Why Buying an Electric Car Through Your Business Can Still Have Hidden Tax Benefits Despite New VED Charges

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From April 2025, electric vehicles will be subject to Vehicle Excise Duty (VED)
Companies purchasing a new electric vehicle can claim the cost of the electric vehicle as capital allowances through First Year Allowance
Electric vehicles benefit from a 2% Benefit-in-Kind (BIK) tax rate, significantly lower than the rate for petrol and diesel cars.
VAT-registered businesses can reclaim 100% VAT on electric vehicles that are used for business

Electric cars will soon be taxed, but business owners can still unlock hidden gems in tax savings.

Up until April 2025, electric vehicle (EV) owners benefited from being exempt from Vehicle Excise Duty (VED), also known as road tax. However, the Autumn Budget 2024 saw Chancellor Rachel Reeves announce that EVs will now be subject to VED from April 1, 2025, bringing them in line with petrol, diesel, and hybrid vehicles.

Chartered Accountancy firm Ridgefield Consulting explains. Whilst this change may make some reconsider purchasing an electric vehicle due to the loss of VED exemption, there are still significant hidden tax benefits, particularly for company directors and business owners, when compared to petrol, diesel, or hybrid alternatives.

Why Electric Cars Are Still a Tax-Smart Choice for Businesses

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100% First-Year Capital Allowance (FYA)

If you buy an electric car through your limited company, you can claim 100% First-Year Allowance (FYA). This means you can deduct the entire cost of the vehicle from your company’s taxable profits in the first year, significantly reducing your corporation tax bill.

How This Compares to Petrol/Diesel Cars:

Petrol, diesel, and hybrid cars do not qualify for FYA.
Instead, they must use the Writing Down Allowance (WDA) at only 6% per year, meaning deductions are smaller and spread over numerous years.

Key Conditions for EVs to Qualify for FYA:

The car must be brand-new and fully electric (not second-hand or hybrid).
It must be purchased through your company, not personally.
It reduces corporation tax liability for the current year.

Example Calculation:

Your limited company buys a £40,000 brand-new electric car, and your taxable profits for the year are £45,000.
You claim 100% FYA, deducting £40,000 from taxable profits, leaving only £5,000 of taxable profits.
If your company pays 19% corporation tax, this results in a £7,600 tax saving.

Corporation Tax Savings on Lease Payments for Electric Cars

If you decide to lease the electric car through your business, you can claim the lease payments as a business expense. This means the lease costs reduce your taxable profit, lowering your corporation tax bill.

VAT Reclaim on Electric Vehicles:

If your business is VAT-registered, you may be able to reclaim VAT on your EV purchase or lease:

100% VAT Reclaim if the EV is used exclusively for business purposes.
50% VAT Reclaim if the EV is used for both business and personal use.
Leased EVs: You can reclaim 100% of the VAT on lease payments if the car is used only for business.

If there is personal use, you may need to pay Benefit-in-Kind (BIK), income tax, and national insurance contributions.

Electric Vehicles Have a Lower Benefit-in-Kind (BIK) Rate Than Other Cars

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If an electric vehicle is purchased through the business and used for personal use, it will incur a Benefit-in-Kind (BIK) tax.

However, electric vehicles offer significant tax savings compared to petrol or diesel cars.

BIK for fully electric cars is just 2% in 2024/25.
Petrol and diesel cars have much higher BIK rates, typically 20-37% depending on CO₂ emissions.

Example BIK Calculation:

A petrol/diesel company car with a £40,000 list price and a 30% BIK rate would result in £12,000 taxable benefit per year.

An electric car with the same list price at a 2% BIK rate would result in just £800 taxable benefit per year.

Simon Thomas, Managing Director and Chartered accountant of Ridgefield Consulting commented on the incoming tax changes:

“While the introduction of VED on electric vehicles from April 2025 may seem like a setback, electric cars still offer significant tax advantages for businesses. The ability to claim 100% First-Year Allowance (FYA) and the lower Benefit-in-Kind (BIK) tax rate of just 2% means that business owners and company directors can still see substantial savings on corporation. Despite the introduction of VED, electric vehicles remain a tax-efficient choice for businesses, offering valuable savings through FYA, lower BIK rates, and VAT reclaims. While road tax and car supplements may add some costs, the overall tax benefits make EVs an attractive option. For further clarity, we recommend seeking professional advice to ensure you’re maximising the potential savings available.”