Company cars: why electric vehicles make better financial sense

From 6 April, a 0% benefit-in-kind rate on electric vehicles will mean big savings for company car drivers, explains Hiten Sonpal, director in NatWest’s Future Mobility Group.

The most recent figures from the Society of Motor Manufacturers and Traders (SMMT) indicate that sales of battery electric vehicles more than trebled in January 2020 compared with the same period last year. In total, electric and hybrid-electric vehicles now make up 12% of the new car market, according to the SMMT, almost twice as large a share as 12 months ago.

Alongside the greater choice of models and wanting to turn away from traditionally fuelled vehicles, the government’s stated policy of phasing out sales of new diesel and petrol cars and plug-in hybrids by 2035 will doubtless accelerate the transition even further. With the numerous advantages and incentives available for companies that purchase electric vehicles – and those who drive them – now is the time to explore buying electric.

New changes to benefit-in-kind rules

Perhaps the most eye-catching of the incentives for drivers of electric vehicles are the upcoming changes to the way workplace benefits are taxed. Under salary-sacrifice schemes, employees are permitted to make certain purchases out of their gross earnings.

This means they do not have to pay income tax or National Insurance on the sums taken out of their pre-tax salaries. HMRC imposes what is known as a benefit-in-kind charge on which income tax is due. At present, the benefit-in-kind charge on battery electric vehicles is 16%. But from 6 April 2020, the rate is falling to zero for 12 months, before rising to 1% in 2021 and 2% in 2022.

A basic rate taxpayer, taking an electric vehicle via salary sacrifice, could save almost a third following the introduction of the new 0% tax rate. Savings for higher-rate taxpayers may total more than 40%

Hiten Sonpal
Director in NatWest’s Future Mobility Group

This means that a basic rate taxpayer, taking an electric vehicle via salary sacrifice, could save almost a third following the introduction of the new 0% tax rate. Savings for higher-rate taxpayers may total more than 40%.

These changes will also benefit employees who have an electric company car. Prior to April 2020, they would be taxed on 16% of the vehicle’s list price every year – so for a car worth £30,000, the annual benefit-in-kind value would be £4,800. Basic-rate taxpayers at 20% would therefore stand to save £960 extra income tax each year, or £80 a month when compared with those using even the cleanest of  combustion-powered cars. Higher-rate taxpayers at 40% could save £1,920 a year or £160 a month.

When the benefit-in-kind rate falls to 0%, so will these additional tax bills.

These are not the only upsides. When businesses offer salary-sacrifice schemes for company cars, they have to pay National Insurance (known as Class 1A contributions) on the value of the benefit-in-kind received by employees. As the benefit-in-kind rate on electric cars is falling to 0% in April, employers’ extra National Insurance costs drop to zero.

Attractive incentives

But these changes to the way benefits-in-kind are calculated are far from the only incentives linked to electric vehicles. For the past two years, business owners have been allowed to claim accelerated capital allowances worth 100% against the cost of purchasing any cars with low carbon dioxide emissions.

And the government is currently offering a grant worth up to £3,500 on all purchases of qualifying plug-in vehicles – although it remains to be seen how long this subsidy will be available. Additionally, charging points provided by businesses for their employees’ electric vehicles are exempt from the benefit-in-kind tax charges I have described.

Of course, these financial advantages are not the only reasons businesses and individuals should consider going electric. Real-world comparisons suggest that the costs of charging an electric vehicle for each mile driven are considerably lower than paying for diesel or petrol(note it’s also considerably cheaper to charge a vehicle at home rather than on the road, where you will pay duty). And as local authorities around the UK introduce new low-emission zones in city centres and other urban areas, drivers of electric cars will be better placed to avoid extra charges or blanket bans.

This is perhaps most starkly illustrated by London’s Ultra Low Emission Zone (ULEZ), which costs £12.50 a day for most vehicles. Over a three-year period, this could cost a commuter almost £10,000. The capital’s congestion charge of £11.50 a working day – which electric vehicles are also exempt from – potentially adds another £9,000 over three years.

It is also worth bearing in mind that businesses that encourage or incentivise their staff to choose vehicles with lower environmental impact can not only reduce their own organisational carbon footprint, but also potentially increase staff engagement by being seen as a more responsible employer. At the least, a green approach to vehicles adds continuity to any wider sustainability efforts.

There can be little doubt that at some point in the not too distant future, electric vehicles will become the dominant new vehicle in the UK and possibly all over the world. But for a lot of people and businesses, the big question is: when will it become economically viable to make the switch?

As recently as a year or even six months ago, the most prudent course may well have been to take a wait-and-see approach. But the incentives and motivations now available mean that this tipping point has finally arrived. For companies, going electric is becoming cheaper. For employees, going electric is becoming cheaper. And for everyone else, electric means a sustainable future. 


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