Electric and hybrid cars: worth a try?

Sarah Bradford outlines some key tax implications of providing employees with electric or hybrid company cars. 

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As well as raising revenue, the tax system has long been used to encourage certain behaviours and discourage others. One example where this is the case is in relation to the taxation of company cars, where drivers of electric and low-emission cars are taxed less heavily than those with expensive, high-emission models.  

Further, employers can meet the cost of electricity for employees’ private journeys in electric company cars without triggering a fuel benefit charge, and provide workplace charging facilities tax-free. 

Taxation of company cars 

A tax charge arises under the benefit-in-kind legislation where an employer makes a company car available for an employee’s private use. The taxable amount is a percentage of the car’s list price. The percentage (called the ‘appropriate percentage’) depends on the car’s carbon dioxide emissions and, for low-emission cars, its electric range. A higher percentage applies to diesel cars which do not meet emissions criteria.  

The tax charge is adjusted to reflect periods for which the car is not available for the employee’s private use, and also for any contributions the employee is required to make (and does so) as a condition of the car being available for their private use. 

The appropriate percentages (for 2022/23 to 2024/25 inclusive) range from 2% for zero-emission cars to 37% for cars with CO2 emissions of 160g/km and above. A supplement of 4% applies to diesel cars not meeting the RDE2 emissions standard; however, the application of the supplement cannot take the charge over the 37% maximum charge. 

There is a lot of difference between being taxed on 2% of the list price and being taxed on 37%, particularly where the car is an expensive car, making electric and low-emission cars a tax-efficient option.  

Where the car’s emissions are between 1 and 50g/km, the appropriate percentage also depends on the electric range of the car, rewarding drivers who choose cars with a greater electric range.  

The appropriate percentage for cars with CO2 emissions of between 1 and 50g/km is shown in the table below. The figures apply for 2022/23 to 2024/25 inclusive. 

Tax implications 

The following table shows the tax implications for a range of company cars. In each case, the list price of the car is £30,000. 

The above table highlights the difference in the tax ‘hit’ between a zero- or low-emission car and a high-emission car. For a car costing £30,000, a higher rate taxpayer will pay £240 in tax if they choose a zero-emission car or one with emissions between 1 and 50g/km and an electric range in excess of 130 miles.  

At the other end of the scale, an employee with a £30,000 car with emissions of at least 160g/km, paying tax at the higher rate, will have an annual tax bill of £4,440. Going electric could save the employee up to £4,200 in tax each year. 

Employer’s NICs 

Employers must pay Class 1A National Insurance contributions (NICs) on the taxable value of a company car. For 2022/23, the Class 1A NICs percentage is 15.05%. While this is due to revert to 13.8% from 6 April 2023, the Health and Care Levy of 1.25% will apply from that date, so the employer’s hit will remain at 15.05% of the taxable amount. 

Consequently, employers will also benefit if employees have electric or low-emission cars, as the Class 1A NICs charge will be lower if the value of the taxable benefit is lower. Taking the example of a company car costing £30,000 (as shown in the table above), for a zero-emission car with a taxable value of £600, the employer Class 1A NICs hit is £90.03.  

At the other end of the scale, the Class 1A NICs liability on a £30,000 car with CO2 emissions of at least 160g/km and a taxable value of £11,100 is £1,670.55. Where large numbers of employees have company cars, the Class 1A NICs savings available to employers offering employees electric or low-emission models is significant. 

Fuel for private motoring 

Normally, where an employer provides an employee with fuel for private motoring in a company car or meets the cost of that fuel, a taxable benefit arises. This is based on the appropriate percentage used to work out the car benefit applied to the car fuel multiplier for the year. The multiplier is set at £25,300 for 2022/23.  

However, there is no fuel benefit charge where an employer provides or meets the cost of electricity for private motoring in an electric car. This is because HMRC does not regard electricity as a fuel. Consequently, employees can enjoy a significant tax-free benefit. For comparison purposes, the fuel benefit charge for a car with CO2 emissions of 75g/km would be £5,060 (costing a higher rate taxpayer £2,204 in tax), while at the top end of the scale, the fuel benefit charge for a car with CO2 emissions of 160g/km or above would be £9,361 (costing a higher rate taxpayer a further £3,744.40 in tax). 

There are NICs savings for the employer, too, as Class 1A NICs are payable on the fuel benefit charge. These can be up to £1,408.83 per car (based on a car with CO2 emissions of 160g/km or more).  

If an employer wishes to meet the cost of an employee’s private motoring, providing electricity for an electric company car will save the employee tax and the employer Class 1A NICs. 

Charging points 

To encourage employees to adopt electric cars, an employer may choose to install an electric charging point at the workplace.  

Where the employer meets the cost of business mileage, there are no tax implications for the employee. Also, as noted above, an employer can provide or meet the cost of electricity for private motoring in an employee’s company car without triggering a fuel benefit charge. 

It is also possible for employees to use a workplace charger tax-free to charge their own electric or hybrid cars, or one in which they are a passenger, without a taxable benefit arising. This allows the employer to meet the electricity cost of an employee’s private motoring in their own car tax-free. 

The exemption only applies to workplace charging facilities – it does not apply if the employer pays for or reimburses the cost of off-site charging. Further, the exemption is conditional on the charging facilities being available to all employees who wish to use them (or all those at a particular site, where the employer has more than one site). 

The employer can also benefit from a 100% first-year capital allowance on the cost of workplace charging facilities. 

Practical tip 

Electric and low-emission cars can be a tax-efficient benefit for employees, with added Class 1A NICs savings for the employee.