How To Reduce Your Tax Bill With Capital Allowances On Electric Cars
The Government is offering a tasty tax carrot to businesses to try and tempt them out of their traditional internal combustion engined vehicles and into electric or hybrid company cars.
From April of this year and for the next three years, electric company cars that emit 50g/km of CO2 or less receive an attractive business tax benefit in the shape of a full 100% First Year Allowance (FYA).
This allows companies to offset the full cost of the cars in the first year of ownership against their tax bills – a substantial incentive for any business that is prepared to go down an ultra low emission route.
How does the tax incentive work?
Electric car incentives are higher than those for conventional cars which are ineligible for the 100% FYA, thus providing a company with earlier tax relief against its profits than might otherwise have been the case.
The Government has now extended this tax incentive for electric and hybrid company cars emitting less that 50g/km for a further three years, on or up to March 31, 2021.
Before April this year, the qualifying limit for a 100% FYA was 75g/km of CO2, but the Government has lowered the limit in line with falling carbon emissions of new cars entering the market as clean air technologies improve.
However, businesses are not compelled to claim the full 100% FYA should they not wish to – where claiming the allowance might result in a loss, for example. It is also possible to claim less than the full 100%, thereby tailoring the amount of the allowance to achieve the best result for the business.
A 100% FYA is also available for expenditure on electric charge points incurred on or after 23 November 2016 and before 1 April 2019 for corporation tax purposes.
What happens to other business cars?
The Government is clearly trying to push businesses towards investing in the best low emission company cars through the use of tax incentives and, as a result of Government policy, there is now a considerable electric car business tax benefit.
To give you an example, from April 1st this year, cars with CO2 emissions of 110g/km or less but more than 50g/km are allocated to the main pool of cars for capital allowance purposes, where they attract an annual writing down allowance (WDA) of 18%.
However, cars that emit more than 110g/km go into a special rate pool where they attract a WDA of only 8%.
Any cars that were acquired between 1 April 2015 and 1 April 2018, with CO2 emissions of 130g/km or less, are allocated to the main pool where they are eligible for the 18% WDA, while cars emitting more than 130g/km attract the lower WDA rate of 8%.
What about tax treatment of drivers?
The tax benefits of electric company cars don’t just stop at the business itself but also extend to the drivers.
Drivers pay Benefit-in-Kind tax on company cars in line with the vehicle’s emissions. But, at a time when there is currently a 4% surcharge for choosing a diesel car, there is a potential tax benefit for any drivers opting to go for an electric company car.
Electric car benefit-in-kind (BIK) tax treatment is significantly more beneficial than that for conventional engined cars, especially diesels. For example, in the current tax year, 2018-19, electric or hybrid company cars that emit 50g/km of CO2 attract a BIK scale charge of 13% of the vehicle’s P11D value. This rises by 3% to 16% in the tax year 2019-20.
Meanwhile, benefit-in-kind on electric cars that emit between 50 and 75g/km of CO2 is 16% in the current tax year, rising to 19% in 2019-20.
Above 75g/km of CO2, the appropriate scale charge percentage continues to increase by 1% for each increment of 5g/km of CO2, up to a maximum charge of 37%.
New company car tax rules from 2020
However, in 18 months time, from April 2020, a new tax regime comes into force for electric car benefit in kind which is intended to make low emitting vehicles more attractive still to drivers.
The new rules, which were announced at the 2016 Autumn Statement, are based on the pure electric range of the vehicle in question – that is the number of miles that are driven purely with zero tailpipe emissions.
Under the new system of company car tax on electric cars, those that have emissions of 50g/km of CO2 plus a pure electric range of more than 130 miles, will attract a scale charge of just 2% in 2020-2021.
For electric company cars or hybrids with a pure electric range of 70-129 miles, the scale charge is 5%, while for those with a pure electric range of 40-69 miles it is 8%.
Meanwhile, for those vehicles with a pure electric range of 30-39 miles the scale charge is 12%; and for those with a pure electric range of less than 30 miles, the scale charge is 14%.
2020-21 Company Car Tax bands
Electric range (miles)
Critics of the scheme have said, however, that there is a considerable disincentive under current BIK rules to purchase low emitting company cars until 2020 when the new rules come into force.
This is because the current BIK tax regime sees rates rise to 16% for vehicles emitting 0-50g/km and 22% for vehicles of 76-94g/km next year – see table.
|CO2 g/km||BIK%||CO2 g/km||BIK%|
However, despite the apparent anomaly in timing, there is little doubt that Government policy is intended to steer businesses and company car drivers alike down a route in which forthcoming tax incentives for electric company cars make them both desirable and affordable.