(hint: from April 2020 you might want to – £££s)
From 1st April 2020 the tax efficiency of choosing an electric car as a company car might make it attractive from a financial perspective as well as a green one.
Why would you choose an electric car for your company car?
Well, we are all being encouraged to go green or greener wherever possible.
But now the upcoming tax breaks would also seem to encourage the idea of an electric car, and that can work just as well whether you’re looking to buy, lease or contract hire.
You will need to consider not just the tax benefits of an electric company car, but all the factors surrounding the appropriateness of an all-electric car and whether it suits your circumstances and driving patterns, both for business and personal use and life of the car etc. You may have more than one car in the family home, which could increase your options in this thought process.
But, if you are an employee of a company which provides you with a car or car allowance, or you are an owner of your own business trading as a limited company then the tax position is massively improved from 1st April 2020.
Clearly there is another Budget Day coming up (at the time of writing!) on March 11th, so we would encourage you to keep an eye out for any changes that may remove some or all of the tax efficiency.
But, as things stand at the moment, if a company buys an all-electric car with zero CO2 emissions after 1st April 2020, the following will occur:
- The employee will have zero benefit in kind for the tax year 2020/21, followed by only 1% in 2021/22 and just 2% in 2022/23.Clearly very attractive.
Remember, you then pay tax at your marginal rate of tax, most likely 40%, on this amount.
So, say the list price of the car is £40,000…
You pay no tax in 2020/21. Then just £160 the following year, and only £320 the year after.
- The company can claim 100% First Year Allowances on the cost of the car and offset this against its corporation tax bill on its profits in year one.An immediate tax saving in that first year of 19%.
So, using the above example that’s £8,550 tax saved.
When you sell the car, the company will pay corporation tax on the residual proceeds or part exchange value, but no doubt can offset against the next car, if the tax rules remain similar.
- The company can purchase a charging point (for which grants or incentives may still be available to reduce the one off cost) and the employee will not be subject to tax on the “benefit” of having the cost of the electricity paid by the company.There is therefore no fuel benefit for private use of the car (as with everything, this may of course be subject to change in the future).
For those owning their own business and usually extracting their income and maybe “bonuses” via dividends, they probably own their own car at the moment and claim mileage for business usage (as the benefits in kind on average petrol/diesel cars can make other options less attractive).
But, the above tax breaks could well change your perspective.
If the car is instead owned by the company, the costs of insurance and maintenance etc could then all be paid by the company, and the company saves corporation tax on those costs, too.
Plus, of course, VAT can be claimed on maintenance if the company is VAT registered.
And a further thought for business owners
At present, you are probably suffering 32.5% tax on a chunk of your dividends.
If you stop drawing some of those dividends to help the company pay for the car/car finance, you will also save the tax on those reduced dividends (and don’t forget you now don’t need the dividends to fund your own purchase of the car as you did when you were buying it personally!).
That sounds ever more attractive, doesn’t it?
You can choose how the company finances the deal either as a purchase with a loan, HP or some form of lease or contract hire; the employee position remains the same.
And the company gets tax relief on all the payments one way or another (we can also discuss the VAT position for contract hire and leases if you are VAT registered).
Certain hybrids may also have very tax efficient outcomes, but as we understand it, the tax position is dependent upon the mileage range that the car can achieve in full-electric mode.
And no doubt these ranges may be changed in future years in tax terms.
So, as things stand at the moment, there’s clearly some huge potential tax benefits for choosing an electric company car after 1st April 2020.
But, is it right for you?
Would you like to know exactly how much you might personally be able to save or the most tax advantageous choices for your next company car, or even the pros & cons of the various methods of ‘buying’ it to start with (eg leasing, contract hire or just buying it outright)?
Then get in touch – you can message us here, or call us now on 01932 564098; we’d love to help – and the minimal cost of our consultation could save you a lot of money in tax and ensure you buy it in the most advantageous way possible, potentially saving you £1,000s.