It’s a question we hear all the time, and as accountants, our answer is… it depends!
There are several factors to weigh up before making the switch. Read on to explore the key considerations.
Capital allowances are tax deductions that businesses can claim for purchasing capital assets, such as equipment, computers, and furniture.
Typically, company cars do not qualify for full capital allowances. However, businesses can claim a 100% first-year allowance for new and unused zero-emission cars, allowing the full cost to be deducted from taxable profits in the year of purchase.
As it currently stands though, the generous 100% first year allowance will expire on 31 March 2026.
For second-hand electric cars, businesses can claim writing down allowances at 18% of the car's value annually, reducing the taxable profit each year until the asset's value is fully depreciated.
From April 2025, electric vehicles (EVs) will no longer be exempt from Vehicle Excise Duty (VED). Instead, they will be subject to the following rates:
Additionally, EVs with a list price exceeding £40,000 will be subject to the expensive car supplement, which adds £355 per year for five years, bringing the total annual VED to £550 during this period.
These changes are part of the UK government's broader adjustments to vehicle taxation, aiming to align EV taxation with that of petrol and diesel vehicles while maintaining fiscal sustainability.
Benefit-in-Kind (BIK) tax applies when an employee has a company car available for personal use, even if only for one day. Since proving exclusive business use is challenging, HMRC generally assumes some level of private use. The taxable value of this benefit is added to the employee’s income and taxed accordingly.
The BIK rate for company cars is determined by their list price (including accessories) and CO₂ emissions. Fully electric vehicles currently benefit from a low BIK rate of 2%, which remains in place until April 2025. Thereafter, the rate will gradually increase as follows:
| Tax Year | BIK Rate for EVs |
|---|---|
| 2023/24 | 2% |
| 2024/25 | 2% |
| 2025/26 | 3% |
| 2026/27 | 4% |
| 2027/28 | 5% |
For example, if an MG 4 (Long Range) with a list price of £35,000 is provided as a company car, the taxable benefit would be:
The employee will pay Income Tax on this amount at their marginal rate (20%, 40%, or 45%). Employers must also pay Class 1A National Insurance (NI) on the taxable benefit, which is currently at 15%.
For hybrid vehicles, the BIK rate depends on the CO₂ emissions and the electric-only range. The appropriate percentage is determined by the vehicle's CO₂ emissions and electric range, with higher electric ranges generally resulting in lower BIK rates. For instance, a plug-in hybrid with a CO₂ emission of 50g/km and an electric range of 30 miles may have a lower BIK rate compared to a similar vehicle with a shorter electric range.
To determine the exact BIK for a specific hybrid vehicle you can use HMRC's calculator here.
It's important to note that the BIK rates for both EVs and hybrids are subject to change. The UK government has announced plans to gradually increase the BIK rates for EVs over time, while also adjusting the rates for hybrids to encourage the adoption of zero-emission vehicles.
For traditional company cars, a taxable fuel benefit applies when an employer provides fuel for private use. However, electricity is not classified as fuel for tax purposes, meaning no fuel benefit charge applies to company-provided EVs.
If an employee personally pays for charging an EV - either at home or via public charging stations - the company can reimburse them for the electricity cost for business travel. While roadside charging receipts clearly show the total cost, calculating the cost per mile for home charging is more complex due to varying electricity tariffs.
To simplify reimbursement, HMRC allows employers to pay 7p per mile (at 1 March 2025) for business journeys in company-owned electric cars without any tax implications. This rate is reviewed quarterly and may change so you should check the rate here regularly.
If a company provides charging facilities for employees to charge their personal or company electric vehicles at or near the workplace, there is no taxable benefit for the free electricity provided.
To qualify for this exemption, the charging facilities must be located at, or close to, the workplace and be made available to all employees. However, this exemption does not extend to reimbursing employees for the cost of charging their personal vehicles elsewhere, such as at public charging points or motorway service stations.
If you are in doubt as to whether you need to pay tax for charging an employee's electric car, you can use HMRC's checker tool here.
Businesses installing EV charging points can benefit from a 100% first-year allowance (FYA) on the capital expenditure for the provision of equipment used exclusively for charging electric vehicles. This includes costs associated with the purchase and installation of plant or machinery specifically for charging electric vehicles.
Claiming the FYA allows businesses to deduct the full cost of the installation from their taxable profits in the year the expenditure is incurred.
The availability of the 100% FYA for qualifying expenditure on electric vehicle charge-points has been extended up to 31 March 2026 for corporation tax purposes. This extension supports businesses in adopting sustainable practices by providing financial incentives for the installation of EV charging infrastructure.
To reclaim VAT on the purchase of an EV, the vehicle must be used exclusively for business purposes, with no private use permitted. Therefore, in most cases, you won't be able to claim VAT on the purchase of your vehicle.
In order to substantiate the exclusive business use of the vehicle businesses must maintain detailed records. This may include:
Insurance policies that prohibit non-business use.
Physical restrictions, such as locking the vehicle and limiting access to business premises.
Employment contracts that explicitly exclude private use, including commuting.
Board resolutions confirming the vehicle's business-only use and the prohibition of private use.
It's essential that such documentation is established before the vehicle is purchased to ensure compliance.
Implications for VAT Recovery:
Private Use: If there is any private use of the vehicle, even minimal, VAT recovery is not permitted. The vehicle must be unavailable for private use to qualify for VAT reclamation.
Charging Costs: For EVs, VAT can be reclaimed on charging costs if the electricity is used exclusively for business purposes. However, if employees charge the vehicle at home, the VAT on the electricity used is not recoverable by the employer, as the supply is made to the employee, not the employer.
A pool car is a company vehicle made available for use by multiple employees, typically for business purposes. To qualify as a pool car and avoid benefit in kind (BIK) implications, the vehicle must meet specific criteria set by HMRC:
Availability and Use: The car must be available to and used by more than one employee.
Location: It should be kept at the company's principal place of business and not allocated to any individual employee.
Private Use: Private use is permitted only if it is incidental to business use. For example, commuting home with the car to allow an early start to a business journey the next morning is acceptable.
Employee Count: Sole director/employee companies cannot have pool cars, as there must be more than one employee available in the pool.
Home Storage: The vehicle should not be kept at an employee’s home.
Exclusive Business Use: The car must be used only for business journeys, with private use being incidental.
If you would like some further guidance on buying an EV for your business, then please get in touch by email at [email protected].
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