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Electric Vehicles and Taxation – What Do You Need to Know?

Electric vehicles, or EVs, have long been known to be the future of transport. Only recently has this future begun to take shape, as design and manufacture of commercially-available EVs continues to increase and more drivers adopt them. Where there are ecological incentives for going electric, there are also some key financial ones. Indeed, there are numerous tax-related benefits that can be reaped from the ownership or lease of an EV. What are these benefits, and what else might you need to know regarding your new EV and taxation?

EV as Personal Vehicle

In owning or leasing an EV as a personal vehicle, the only tax for which you would be responsible would be road tax, or Vehicle Excise Duty (VED). Since 2001, VED tax bands have been based on the emissive nature of individual vehicles, with more polluting cars attracting a higher rate of taxation. Crucially, for vehicles below £40,000 in value, cars that do not emit any CO2 are fully exempt from taxation.

This makes fully electric vehicles exempt from VED, and hence much cheaper for private citizens to drive compared to gas guzzlers. The advantage is only made starker by the significant difference in cost-per-mile for fuel, to say nothing of the ancillary benefits outlined later in this piece. That said, many new EVs come in over £40,000, ensuring they pay an additional £390 for five years (starting on the second year of would-be taxation).

EV as Company Car

The tax advantages do not stop with private individual citizens, though; EVs can also yield benefits when purchased or leased as company cars – though the specifics are a little more complex than the VED for which personal vehicles are liable. Prior knowledge of company tax frameworks, tax law and calculations are necessary for businesses to chart this route well, but the cost savings for employees can be highly worthwhile.

Company cars are not taxed via VED, but via something called Benefit-in-Kind Tax, or BiK Tax. This is a sliding tax rate, which takes into account both the emissions ratings and monetary value of a vehicle to discover its individual taxable value. BiK Tax rates range from 2% to 37%, though the floor tax rate is set to increase by 3% by 2027. EVs are taxable at this floor rate – meaning that 2% of a company car’s value is taxable. The amount of this that the driver pays, though, is proportional to their own income tax rate; at the 20% base rate, only 20% of that taxable 2% is payable.

Financial Benefits of EVs

Of course, there are numerous financial benefits associated with EVs beyond their taxability. For example, businesses are further incentivised to invest in EVs as company cars due to a 100% first-year capital allowance for which only EVs are eligible. Generally speaking, EVs are cheaper to fuel, and cheaper to service – on account of the fewer moving parts that make up their motors, in comparison to complex internal combustion engines.