In 2022, some 267,000 electric vehicles (EVs) were registered in the UK – up 40% on the previous year. Despite their growing popularity, they still account for only one in every six new cars. The government, currently insisting that the ban on the sale of internal combustion engine (ICE) cars will still take place 2030 (with the sale of hybrids banned from 2035), is taking big steps to encourage a greater take-up of EVs.
Most of those incentives are in the tax realm, and this is particularly the case for EVs bought as company vehicles (fleet sales are thought to account for around four in five of all EV registrations).
It’s not hard to see why: for company car drivers, the savings are huge. Currently, the benefit in kind for an EV is just 2% of its manufacturer’s list price, so a higher rate taxpayer would pay just £400 tax per year on a £50,000 vehicle.
This rate is due to rise by 1% a year from 2025, but only to a cap of 5% in 2027/28 – still much lower than the rate for ICE vehicles, which is currently anywhere between 15% and 37%, depending on the CO2 emissions.
For employers purchasing EVs, there are big benefits too. First and foremost is the fact that for new and unused EVs (which includes demonstrators and vehicles with test-drive mileage), companies can claim a 100% first year capital allowance. Given that cars do not qualify for the Annual Investment Allowance, this is a very valuable benefit – for ICE cars tax relief in any one year is limited to a maximum of 18%, and even that figure only applies to the most efficient vehicles.
Where an EV is leased by way of an operating lease (i.e. hired for a set number of years and then returned), the full monthly rental payment is an allowable expense against tax. If it is used as a company car (i.e. with an element of private use), then only 50% of the VAT on the monthly rental payment can be claimed, as is the case with ICE vehicles.
There are similar benefits for electric vans. Employees who take a work van home don’t have to pay the usual £3,600 annual benefit in kind tax charge if the van is electric.
As you might expect, the tax treatment of plug-in hybrid vehicles (PHEVs) falls somewhere between that of pure EVs and full ICE vehicles. The benefit in kind rates depend on the CO2 emissions and the all-electric range of the car; for a vehicle with emissions below 50g/km and with an electric range of between 40 and 69 miles, the rate is currently 8%.
Vehicle Excise Duty (VED) – EVs are no longer exempt from VED. From 1 April 2025, they are subject to the same rates as ICE vehicles.
First-year rate: £10
Standard rate from second year: £195
The Expensive Car Supplement (previously waived for EVs over £40,000) now applies to EVs registered on or after 1 April 2025.
Hybrid Discounts – The £10 annual discount for hybrid and alternatively fuelled vehicles has been removed.
Overall, though, both employers and employees can enjoy significant tax advantages by driving an EV over a traditional ICE car. This, of course, is in addition to reduced running costs, and the increasingly important PR aspects of being seen to be environmentally responsible when it comes to running your fleet.