What Are the Tax Benefits of Electric Vehicles?

Unless you’ve been living on Mars, which you soon might be thanks to a well-known EV developer, you’re probably aware of the global drive (pun intended) towards electric cars and eco-friendly modes of transportation. 

The switch to using green fuels, and hence electric vehicles, is a main focus of the UK government's strategy to reduce carbon emissions. 

In 2024, the government updated its ‘the ZEV (Zero Emission Vehicle) mandate’, which outlines annual sales targets for car manufacturers from 2024 to 2030. The objective is for all new car/van sales to be ZEVs by 2035. 

This year, these targets will be 22% for cars and 10% for vans. 

The ban on the production of diesel vehicles has been delayed from 2030 to 2035. 

‘’The question is no longer whether the internal combustion engine’s days are numbered, but how fast we get there.” - Richard Hebditch, director of Transport and Environment UK

But EVs are not just good news for the environment, they could also offer significant gains on the company car tax front for employers, business owners and employees. So if you’re a convicted petrol-head, at least you can take some satisfaction in the fact that there are many potential savings to be had.

Road Tax & Congestion

Firstly, one of the main tax benefits of electric vehicles for both companies and the public is that they are completely exempt from road tax, or vehicle excise duty (VED) as it was previously known. This tax exemption will be available until April 2025, after which they will be taxed the same as other conventionally fueled vehicles.

As of April 2020, EVs are also exempt from a road tax surcharge, which is currently applied to all cars registered after April 1st, 2017, and costing over £40,000.

Many drivers will also be pleased to hear that, in addition to road tax, EVs are exempt from the widely resented congestion charges required for entry to CAZs (clean air zones). CAZs already exist in London, Birmingham, Bristol and others, and are set to be rolled out across the country. This is a controversial move that is likely to invoke a reaction from motorists, who rely on driving inside urban areas for work or business. So be prepared for potential legislative adaptations in the future.

According the most recent stats from the TfL Annual Report, drivers in London alone spent an estimated £307 million on congestion charges in 2021/22. So clearly the ability of EVs to drive through urban centres completely free of charge is a massive benefit to many workers and companies, who need essential access to these areas. As with road tax however, this exemption on congestion charges for EVs will finish in December 2025. So now’s certainly the time to take full advantage of these financial savings. 

Capital Allowance

Aside from the above exceptions for road tax and congestion charges, electric vehicles offer even more tax benefits for companies, business owners, and employees using company cars.

For the first year of purchase, businesses can claim 100% capital allowances for the cost of an EV against profits before tax, without any limit on the value of the vehicle. Although the vehicle must be new and unused. This is a great incentive to use EVs as company cars, especially as from April 2021, you can no longer claim this tax-relief for hybrid vehicles.

VAT

Although EVs are not exempt from VAT you can still claim back 50% of VAT if the car is for business use only. You can also claim VAT for charging, again, if the car is for business use. We recommend reading this guide for more info. 

‘Benefit in Kind’

Another tax benefit of EVs is a far lower Benefit in Kind (BIK) charge in comparison to non-electric vehicles.

As with other benefits-in-kind, such as dental care, gym memberships, cycle-to-work schemes, etc, company cars that are used for personal as well as business use incur a tax.

The rate at which you are taxed for a BIK is based on the CO2 emissions and the vehicle's list price (not the amount you paid for it). For petrol or diesel-powered vehicles, this can be up to 37%. 

So, when you learn that the BIK rate for EVs is just 2%, you can see how going green could increase your revenue or income. This rate will stay at 2% until 2025.

The comparison below illustrates the savings clearly. Notice that the cars are the same model and the EV has a higher list price…

If you are an employee your employer will complete a P11D from, or use the payrolling system to report tax on a benefit-in-kind. If it’s the former they should give you a copy of the P11D form. If you’re self-employed and complete a self-assessment then you add the information P11D to your tax-return.

Fuel

As electricity is not classed as a fuel by HMRC, there is no benefit in kind charge for EVs. 

From 1st June 2024, the advisory electricity rate for fully electric cars is 8 pence per mile. Meaning you can claim a reimbursement of up to 9p per mile for every business mile travelled, tax free.

Below are a few points regarding the tax deductions/reliefs available for EV ‘’fuel’’ - electricity. However, ascertaining your entitlements for this can become quite a complicated task. And unfortunately HMRC does not provide particularly clear information on tax benefits for EVs. 

We recommend speaking to one of our expert advisors if you are seeking further guidance. 

• If you charge your own personal vehicle at your home, at a charging point paid for and installed by your employer, then you will incur a benefit-in-kind. However, you can claim tax relief for business miles travelled

• When your employer reimburses you for the cost of electricity used to charge a company vehicle at home, this is treated as taxable earnings. However, you can claim tax-relief for business miles travelled

• If an employer pays you to charge your personal vehicle at a charge point, then you will be taxed for this benefit as per the cost incurred by the employer. However you can claim tax-relief for business miles travelled 

For more details on reimbursement to a company as an employee, or to an employee as a company see HMRC’s webpage.

Tax on Charging EVs

The cost of charging EVs and providing charging facilities may be eligible for taxable benefit exemptions. Whether employers that provide charging points for their employees are exempt from BIK tax, depends on a few criteria:

• The charge point is installed at or near the company workplace (This includes the charging of personal vehicles as long as that charge point is available to all employees)
• The charge point is installed at the employee's home and paid for by the company, if the employee is charging a company car. 
• The employer pays the employee to charge a company car

You can check your tax liability for the charging of employee cars here with HMRC’s online form.

Electric Bikes

There are also tax benefits to be had from a two-wheeled perspective. With the Cycle-to-Work scheme companies can offer a tax-free benefit to employees. 

The salary sacrifice allows companies to purchase e-bikes at a 50% discount on their market value and then loan them to employees via a hire agreement that they repay with a small reduction in salary. After a certain amount of time, usually several years, the employee can take full ownership of the bike.

This arrangement has increasing appeal due to the movement towards making cities more cycle-friendly. 

Grants for EVs

If you’ve been impressed with the tax benefits of electrical vehicles thus far, here’s something that will really get you charged-up…

On top of the tax breaks available, the government also issues a number of grants to encourage the adoption of green transportation.

These are offered by the Office for Zero Emission Vehicles, some of the current grants are as follows: 

1. EV chargepoint grant (EVCPG) - Depending on which is lower, this provides up to £350 or 75% off the cost of purchasing and installing a chargepoint to home-owners.

2. EV infrastructure grant (EVIG) - Helps landlords with the cost of larger-scale construction work required for the installation of multiple chargepoints. You can receive 75% or £30,000 off the cost of the work, depending on the number of parking spaces covered. Be aware, this grant is set to end in March 2025.

3. Workplace Charging Scheme (WCS) - Provides up to 75% of the cost (inc. VAT) of purchasing and installing a chargepoint, capped at a maximum of £350 per socket and 40 sockets across all sites per applicant. Available to qualifying charities, businesses and organisations. This grant is also set to end in 2025.

To see the full range of grants see HMRC’s webpage.

Hopefully upon learning about the various tax and financial benefits on offer for electric vehicles, you can see that there are many incentives for switching to eco-friendly transport for work and business. As we’ve pointed out in this article, these benefits are likely to be curtailed as the push towards a green future gathers momentum. So if you’re looking for further advice you can speak to our team of experts.