In 2021, more pure-electric cars were sold than in the whole of the previous five years, according to figures from Society of Motor Manufacturers and Traders (SMMT). As a result, sales of electric cars powered solely by battery rose to 11% of all the cars sold in 2021. From the perspective of employers does this swing might well indicate that offering an electric car as a company car is now more desirable than perhaps it has been in the past?

Provided all the practicalities work out, there can be very substantial tax benefits for both parties if an employee is happy to use an all-electric car with zero-emissions rather than a diesel, petrol or hybrid company car. The two biggest benefits are the upfront tax reliefs on purchase for the employer, and the vastly reduced benefit in kind costs, which primarily (but not exclusively) benefit the employee.

Capital allowances

Employers who purchase cars which employees can use privately are generally only able to obtain tax relief for the cost quite slowly under the system of writing down allowances. In contrast, a business purchasing a new electric car no later than 31 March 2025 is entitled to claim 100% first year allowances, which means that the full cost can be offset against taxable profits in the year of purchase.

While this requires the employer to have sufficient profits to benefit from such a write off – and there may be a sting in the tail later on when the car is sold and some of that relief is clawed back – there is the potential for a sizable cash flow benefit in the first year of ownership.

Benefits in kind

For the employee, a company car is often an expensive perk, as they are taxed on the cash equivalent value of the vehicle, which is calculated as a percentage of the car’s list price. The percentage for conventional combustion engines varies depending on the car’s emissions, and can go as high as 37% for the most polluting options. However, for a zero emission electric car, the current percentage to apply to the list price (which must include the cost of the battery) is as little as 1% this year (2021/22). While the benefit is set to double in 2022/23, 2% remains a very attractive proposition and that percentage figure is set to remain until 2024/25.

While of course there is no guarantee that such low benefit in kind rates will continue beyond 5 April 2025, significant income tax savings for the employee - and Class 1A savings for the employer – are available for the next three tax years.

Charging

There are also further benefits available for employers who are prepared to make provision to charge the car. Employers can claim 100% first year allowances on the cost of installing electric charging equipment at their premises – and no benefit in kind will arise for any employees using such facilities made available to them by their employer at or near the workplace - even if they go on to use that charge for non-business purposes. This applies not just to employees with company cars, but also to employees using their own electric vehicles.

Of course many employees with an electric company car are also likely to want to charge it at home. Employers providing a company car can install a dedicated charge point at the employee’s home without creating a benefit in kind – although the reimbursement of the electricity used for private mileage would then be taxable.