Tax tip: Electric cars remain a tax-efficient perk for company owners

From April 2026 the benefit in kind tax on electric cars increased from 3% to 4%, while the bands for hybrids also increased by 1%, with both set to rise by 1% again next tax year.

The following bands apply to vehicles emitting up to 50g/km of Co2:

Electric cars have zero emissions so are in the first category.  Meanwhile, more and more hybrid models are being launched that emit less than 50g/km of Co2 and fall into the 70-129 mile category, which still carries a low BIK rate of 7%.

You’ll be doing well to find many options that can cover more than 130 miles on electric range only, so while that category of hybrids enjoy the same benefit in kind rates as pure electric cars, we are yet to see any real world examples among our client base!

Under current legislation, the table above shows that the BIK percentage for hybrids is set to increase to 18% across the board from April 2028 onwards; while the BIK percentage for electric cars is set to increase by 2% to 7%.  This may be revised in future Budgets, but this means that hybrids become less tax efficient from 2028/29 onwards, leaving electric cars as the safer bet to maximise tax savings.

The percentages in the table above are applied to the list price of your chosen car when new to work out the benefit in kind, which will then be reported to HMRC (with our help) on a form P11D.  You will then have to pay personal tax on the benefit in kind (typically at 20%), while your company will have to pay 15% Class 1A National Insurance annually on the same value.

So there are some taxes to pay if your company buys an electric or hybrid car for you to use, but they are manageable.

The advantage of doing so is that the company can then claim Corporation Tax relief on the costs of buying or leasing the vehicle, plus insurance, servicing, tyres and repairs.

If you buy an electric vehicle brand new, whether outright or on finance, your company can claim capital allowances of 100% on the price paid for the vehicle in the year of purchase.  You’ll therefore save (up to) 25% Corporation Tax on the value of the vehicle.  The downside of doing so is that your company will then have to pay Corporation Tax on the sale proceeds in the future when you come to sell it, but this offers a great front-loaded tax incentive to significantly reduce your Corporation Tax bill in the year you buy it.

This 100% first year allowance for buying a new electric car is due to end on 31 March 2027, making this a great time to consider making the change to electric, before that front-loaded Corporation Tax saving opportunity comes to an end.

Alternatively, if you lease it then you can claim tax relief on the lease payments, which means the Corporation tax relief is more evenly spread across the period you have the car.  A further advantage to leasing is that you can reclaim half of the VAT on the monthly lease payments, if you are VAT registered, whereas no VAT recovery is possible if you buy it (outright or on finance).

What about hybrids?  The 100% capital allowance mentioned above is only available for (brand new) pure electric cars, with hybrids attracting capital allowances of 18% per annum, meaning the tax relief for buying a hybrid vehicle are spread more evenly, much like leasing one.  This 18% capital allowance equally applies to new or used hybrid vehicles (providing they emit less than 50 g/km of Co2) and the same rate also applies to the purchase of second hand pure electric vehicles.

In both cases the company can also pay for the running costs, including insurance, servicing, tyres and repairs, with VAT also reclaimable on those costs if you are VAT registered.  Your company can also reimburse you for home charging costs, using HMRC approved business mileage rates (see Q&A article).

Many business owners want to keep their incomes below the higher rate threshold of £50,270, to avoid higher rate tax, or under £60,000 to avoid the High Income Child Benefit Charge, but with the cost of living rising year on year and these thresholds staying frozen, this is becoming increasing difficult.  For those clients that use part of the funds they withdraw from their companies in salary and dividends to make finance payments on a personally owned car, then why not buy an electric car through your company so that your salary and dividends go further?  Every little helps!

For more information, please contact your Client Manager.