Tax Relief on Buying an Electric Car Through a Limited Company in UK

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Purchasing an electric car through a limited company in the UK isn’t just an environmentally friendly choice; it’s a smart financial move. With the UK Government increasingly encouraging businesses to adopt greener practices, there are attractive tax reliefs available for those who invest in electric vehicles (EVs). 

From corporation tax deductions to Benefit-in-Kind (BIK) advantages, the savings are significant. But how do these incentives work, and what HMRC regulations should you be aware of? 

Let’s explore how buying an electric car through your limited company can be both a cost-effective and forward-thinking investment.

Can You Buy an Electric Car Through a Limited Company?

Buying an electric car through a limited company is entirely possible and, in many cases, advantageous. This option is particularly appealing for company directors and employees, as it allows the business to own the vehicle while enabling tax savings and benefiting from various financial incentives. 

By purchasing an electric vehicle (EV) under a company’s name, you can access specific tax reliefs, such as reduced Benefit-in-Kind (BIK) rates and capital allowances, which can make a substantial difference in overall costs. 

The UK Government has designed these benefits to support businesses in reducing their carbon footprint while simultaneously enjoying a tax-efficient investment. However, it’s essential to understand the relevant HMRC guidelines to ensure compliance and maximise potential savings.

Issues to Consider When Buying an Electric Car Through a Limited Company

When buying an electric car through a limited company, several practical considerations and potential challenges come into play. Understanding these issues can help you make a more informed decision, balancing convenience, compliance, and cost-effectiveness. 

One of the first factors is charging infrastructure, which requires adequate access to a charging point—either at home or near your business location. Additionally, government policies, including Benefit-in-Kind (BIK) tax rates and future adjustments to CO2 and NOx emissions standards, will impact your tax benefits. 

Here are key issues to keep in mind:

Charging Access: Ensure you have convenient charging options, such as off-road parking at home, to install a charging point. You’ll also need access to local public charging stations if home charging isn’t feasible.

Benefit-in-Kind Tax Rates: The UK Government sets annual BIK rates to encourage low-emission vehicles. These rates are frozen for electric vehicles but will gradually increase by 1% annually from 2025 for cars emitting less than 75g/km.

Vehicle Type: Decide between pure electric vehicles, plug-in hybrids, or hybrids. Pure electric vehicles are eligible for the most substantial tax relief but may require more charging planning.

Long-Term Incentives: While tax incentives currently favour electric vehicles, future regulatory changes could impact the overall benefits. Keeping up to date with HMRC guidelines will help ensure you’re making the most cost-effective decision.

Hybrid vs Electric: Hybrid vehicles have different tax implications and may not offer the same level of relief as pure electric vehicles. Assess whether a hybrid option aligns with your business’s environmental and financial goals.

Benefits of Buying an Electric Car Through a Limited Company

Purchasing an electric car through a limited company offers numerous financial and environmental benefits, making it an attractive option for directors and business owners alike. With the UK Government’s strong focus on reducing carbon emissions, businesses investing in electric vehicles (EVs) can access substantial tax reliefs. 

These benefits are designed to lower the overall cost of ownership, making EVs a savvy choice for forward-thinking companies.

  • Corporation Tax Relief: Businesses can claim capital allowances on electric vehicles, allowing for a deduction against profits, thereby reducing overall corporation tax liability.
  • Reduced Benefit-in-Kind (BIK) Rates: Electric cars currently attract lower BIK rates compared to petrol and diesel vehicles, resulting in significant tax savings for directors and employees.
  • Enhanced Capital Allowances: A 100% First Year Allowance (FYA) is available for new electric vehicles, allowing businesses to deduct the full cost from their profits in the year of purchase.
  • Fuel Savings: EVs cost less to operate than traditional vehicles, with electricity being more economical than petrol or diesel. Plus, some businesses can install workplace charging stations, enabling further cost savings.
  • Positive Environmental Impact: By switching to an electric vehicle, your business supports the UK’s zero-emission goals, enhancing your brand’s image and appealing to eco-conscious customers.
Taking advantage of these benefits can result in lower operational costs, improved cash flow, and a stronger commitment to sustainability.

Tax Relief and Allowances

When a limited company purchases an electric vehicle, it can benefit from several tax reliefs and allowances designed to promote environmentally friendly business practices. 

One of the most significant incentives is the 100% First Year Allowance (FYA) on electric cars, allowing businesses to claim the full cost of the vehicle against their taxable profits in the year of purchase. 

This can lead to substantial corporation tax savings, as it enables companies to deduct the entire cost of the vehicle, effectively reducing their taxable profits. Additionally, businesses can claim capital allowances on charging infrastructure, making it more cost-effective to install charging points either at the business premises or at employees’ homes. 

By taking advantage of these allowances, limited companies can lower their tax burden, improve cash flow, and support the government’s drive toward a greener economy. For higher-emission vehicles, these tax breaks are significantly reduced or unavailable, which further highlights the appeal of electric vehicles from a tax efficiency perspective.

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VAT Treatment on the Purchase

VAT treatment on electric vehicles purchased through a limited company in the UK varies depending on the vehicle’s use. If the electric car is used solely for business purposes, the company can typically reclaim the entire VAT paid on the purchase, providing considerable cost-saving. 

However, if the car is used for personal journeys, which is often the case, only 50% of the VAT on leasing costs can be reclaimed. This partial VAT reclaim rule recognises that many company cars are used for both business and personal trips, requiring businesses to account for non-business use. 

Additionally, VAT on electricity used for charging is reclaimable, provided it’s charged at a business location, making it more affordable for companies to maintain their electric fleet. It’s essential to follow HMRC guidelines closely to ensure VAT is reclaimed accurately, and compliance is maintained. 

For companies considering an electric vehicle purchase, understanding the VAT implications can help to maximise cost-effectiveness while remaining aligned with UK tax regulations.

Leasing a Hybrid Car Through a Limited Company

Leasing a hybrid car through a limited company is a flexible alternative for businesses looking to balance fuel efficiency and environmental impact without committing to a full purchase. 

Hybrid vehicles combine an electric motor with a traditional combustion engine, offering better fuel economy and lower emissions compared to petrol or diesel-only cars. 

Leasing allows companies to access these benefits with lower upfront costs, and it can be a cost-effective way to upgrade vehicles regularly. However, there are specific tax considerations to keep in mind. 

  • Benefit-in-Kind (BIK) Tax Rates: Hybrid vehicles attract lower BIK rates than traditional cars, particularly for low CO2-emitting models, which can reduce tax liability for employees and directors.
  • VAT Reclaim: Companies can generally reclaim 50% of the VAT on the lease payments if the vehicle is used for both business and personal journeys. For business-only use, 100% of the VAT is reclaimable.
  • Operational Flexibility: Leasing offers the flexibility to upgrade to newer, more efficient hybrid models as technology advances without the long-term commitment of ownership.
  • Lease Payments as Tax-Deductible Expenses: Monthly lease payments are often tax-deductible as business expenses, reducing overall taxable profits.
  • Maintenance and Depreciation: Leasing typically includes maintenance, which can lower operational costs and it eliminate concerns over vehicle depreciation.

This leasing approach can help your company enjoy the benefits of hybrid technology while optimising cash flow and reducing overall tax burdens.

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Closing Note

Buying an electric car through a limited company in the UK is a smart financial move with substantial tax benefits, such as capital allowances, reduced Benefit-in-Kind rates, and VAT relief. By choosing electric, your business can save on costs while supporting sustainability efforts. This investment isn’t only eco-friendly but also a strategic way to enhance your company’s financial health.

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  • Email: office@evirtualaccountants.co.uk 
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