As the car industry evolves, the debate between electric and fossil fuel vehicles has intensified, especially due to their financial and environmental impacts. Understanding the tax implications of choosing between electric and petrol/diesel cars is crucial. This analysis delves into the comparison between the two options using a company car situation, focusing on the Benefit in Kind (BIK) tax rates, company implications and capital allowances.
Personal tax implications
Choosing either an electric or a fossil fuel car will result in a Benefit in Kind (BIK) being added to your salary for tax purposes. The BIK is the value of the benefit provided by the company, and you will pay tax on this amount. The key difference lies in the BIK rates between the two options:
- Petrol/diesel and hybrid cars: Typically have higher BIK rates due to their emissions. For example, a hybrid car with an electric range of 30-39 miles and emissions of 1-50 g/km has a current BIK rate of 14%, increasing to 19% by 2029/30. For a car with a list price of £50,000, the BIK amounts to £7,000 annually. This adds £7,000 to your taxable income, resulting in a tax of £1,400 at the basic rate (20%) or £2,800 at the higher rate (40%).
- Fully electric cars: Currently have a much lower BIK rate of 4%, rising to 9% by 2029/30. For the same £50,000 car, the BIK is £2,000, adding this amount to your taxable income. This results in a tax of £400 at the basic rate (20%) or £800 at the higher rate (40%). No national insurance is paid on BIK.
Company implications
The company must pay National Insurance Class 1A on any BIK, which is 15% of the BIK amount.
Capital allowances
- Fully electric cars: The company can deduct the entire cost of a brand new fully electric car from company profits under the Annual Investment Allowance (AIA).
- Non-electric cars (including hybrids): The company can only deduct a percentage of the cost each year, either 6% or 14% depending on emissions, until the entire value is used.
Additional considerations
- Environmental impact: Electric cars are more environmentally friendly, enhancing the company’s profile.
- Operational costs: Electric cars generally have lower running costs, contributing to overall savings.
In conclusion, the choice between electric and fossil fuel vehicles is not just a matter of preference; it has significant financial implications. By opting for electric cars, you can benefit from lower taxation, savings on operational costs, and a positive environmental impact. As the landscape continues to shift, making decisions now will pave the way for a more sustainable and economically advantageous future.