Your Questions Answered by TaxAssist Accountants

Petrol versus electric cars – what are the tax differences?

I’m a business owner and am looking to replace my existing company car. My company is in the fortunate position where it can fund the purchase through the cash it holds. I’d like to buy a car which minimises environmental impact and I’ve decided to get an electric car. My current car’s CO2 rating is 142g, which leads to a big car benefit charge as I’m a higher rate taxpayer, but I would be interested in minimising this. I’m looking at purchasing a Tesla Model 3 at a list price of £41,990.

Answer

Many business owners are now considering their future options in respect of making car purchases and below are some of the main consequences and benefits of replacing your car with an electric vehicle.

The below assumes the company goes ahead and purchases a new Tesla Model 3 at a list price of £41,990.

As the car is electric and classified as zero emission, the company may claim a 100% write-off against the company profit in the accounting period the car is bought. This creates a corporate tax saving of £7,978 (£41,990 x 19%).

If the company had replaced the car with another petrol car, which didn’t qualify for the special 100% write off allowance, it may only attract an initial tax allowable deduction of 18%, or possibly just 6%, dependent on the CO2 output. This would result in a much lower upfront corporate tax saving in the accounting period. For example, a saving of just £1,436, 19% x (£41,990 x 18%).

By opting for a greener zero-emission car, the company can write off the full cost of the car in the accounting period and upfront the corporation tax relief. The initial tax saving in this case could be £6,542. That is £7,978 compared to £1,436.

In this example we haven’t considered the tax consequence for the disposal of your current car, and the balance of written off expenditure would need to be compared to the price you receive. There may be additional tax to pay (balancing charge) or extra tax relief to claim (balancing allowance), depending on the final value of the vehicle.

As well as providing an initial tax saving, the company owner who drives the car also benefits by saving tax on a much-reduced car benefit charge.

Since you are a higher rate taxpayer and assuming the car was provided is available from 5th April 2021, the benefit tax charge would be 40% x (1% x £41,990) = £167.96. Your company would also have a reduced NIC liability of only £57.95 – 13.8% x (1% x £41,990).

Information supplied by Cheryl Hopkins, Chartered Certified Accountant, TaxAssist Accountants. Advice shared in this article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayers’ circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take, action, as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.