A guide to company tax (BIK), and road tax benefits for electric cars
09 July 2021 | Matt Mostyn
It’s no surprise why electric vehicles (or EVs) are becoming more popular and accessible by the day. From the cost-savings to the environmental benefits, EVs are becoming an increasingly attractive proposition. And that’s equally true when it comes to introducing electric cars into a business or organisation.
EVs attract low benefit-in-kind (or BIK) rates – and that helps to make them a cost-effective option as a company car. Add up the further savings in everything from road tax to congestion charges, and it’s no surprise why companies are thinking about switching to electric.
If you’re considering choosing an electric car for work, here’s our comprehensive guide to the various tax benefits of electric company cars. Read on to find out how much you’ll pay, and the savings you can make with an EV company car.
Tax on benefit-in-kind (BIK) for electric cars
Benefit-in-kind (or BIK) is a tax on employees who get benefits or perks on top of their salary. It ’s usually collected through your PAYE (Pay As You Earn). If you have a company car for private use, you’ll usually have to pay a BIK contribution, or company car tax. But this is no longer the case if you have an electric vehicle.
Is BIK payable on electric cars?
At the start of the 2020/21 tax period, the government lowered the BIK tax rate for fully electric and low-emission vehicles. It used to be 16% for this category – but as part of the government’s efforts to encourage use of EVs, they’ve reassessed the BIK rates for electric and low emission vehicles. So here’s the good news...
What is the BIK rate on electric cars?
Company car drivers choosing a pure electric vehicle will pay no BIK tax in 2020/21. In other words, it’s come right down to 0% – which means an EV driver with a company car will pay no BIK at all for this financial year.
There are 2 sets of guidelines – one for those driving a company car registered before 6 April 2020, and the other for those driving a company car registered after 6 April 2020. See table 2 below, to find out the BIK rates for different vehicle categories.
The zero percentage rate covers company car drivers in pure electric vehicles registered prior to 6 April 2020. And it also applies to company cars registered from 6 April 2020, with emissions from 1-50g/km and a pure electric mile range of 130 miles or more.
For the 2021/22 tax year, the rate goes up slightly, to 1% – and for the 2022/23 tax year, the rate will be 2%. Which is still a pretty small price to pay, to enjoy all the benefits that electric vehicles offer.
Benefit-in-kind comparison: electric vs petrol
As an example, here’s a comparison of the new Hyundai IONIQ Electric compared to the BMW 3 Series Saloon:
Table 1: BIK comparison, Hyundai IONIQ Electric v BMW 3 Series Saloon:
|Hyundai IONIQ Electric (BIK per year)||1%||2%||2%|
|BMW 3 Series Saloon (BIK per year)||34%||35%||35%|
Will the BIK rate for fully electric cars change?
Beyond the 2022/23 tax year, rates have not yet been confirmed. But as more and more electric cars join company-car fleets, they’re likely to creep back up.
Is the BIK rate different for hybrids?
The BIK rate for plug-in hybrid electric vehicles (PHEVs) is also less than you’d pay for a petrol or diesel vehicle.
The cost very much depends on how far they can be driven in electric mode, as well as their CO2 emissions.
Not sure whether a hybrid or full EV would work better for you? Check out our guide to the differences between petrol, electric and hybrid cars.
What is the benefit-in-kind on a hybrid car?
Many popular plug-in hybrid company cars can cover 30 to 39 miles on electric power. For this category, a driver will pay BIK at 10%. And if your PHEV has an even longer range of 40-49 miles, the rate falls to 6%.
Whichever category your PHEV falls into, it’s still far less than the 20% (or above) rates for petrol and diesel cars. So there are some serious savings to be made!
How to easily compare BIK rates for different vehicle categories
Table 2: Benefit-in-kind rates for vehicles with less than 50 g/km CO2 emissions before and after 6 April 2020:
Tax credits for electric cars
From capital allowances to congestion charges and road tax, there are all kinds of other tax benefits to driving an EV. Here’s a summary of each:
Capital allowances on electric cars
You can claim capital allowances on cars you buy and use in your business. This means you can deduct part of the value from your profits before you pay tax.
Cars with CO2 emissions of less than 50g/km are eligible for 100% first year capital allowances. This means that if you have an electric car, you can deduct the full cost from your pre-tax profits.
On a car that costs £40,000, this could mean tax relief of £7,600 in the first year.
Congestion charge exemptions for EVs
Remember, electric cars are also exempt from congestion charge taxes. So if you’re driving a company car in a “clean air zone”, you’ll be able to make even more tax savings by driving electric.
In London, for example, the congestion tax currently costs £11.50 a day per vehicle between 7am and 6pm, Monday to Friday. So if you drive within the congestion zone on every weekday of the year, you’ll save nearly £3,000!
Read more about the government electric car grants and incentives available for EV owners
Road tax on electric cars: are EVs tax exempt?
From April 2020, all zero emissions vehicles are exempt from road tax (also known as Vehicle Excise Duty). This is because all fully electric cars have no tailpipe emissions. And it means your road tax is completely free. Result!
There was previously a charge for more expensive cars, costing over £40,000 – but this has also been scrapped for electric vehicles.
With vehicle road tax (also known as Vehicle Excise Duty) now being based on carbon dioxide emissions, pure electric cars are exempt. This is because all fully electric cars have no tailpipe emissions. And it means your road tax is completely free. Result!
Do you pay road tax on EVs?
Tax bands for road tax (VED) are based on CO2 emissions. The more harmful the vehicle, the higher the rate of tax. As you know, zero emission cars are in the zero tax bracket – which means you won’t pay a single penny in road tax.
In comparison, the highest first year rate charge for vehicles with CO2 emissions of 255g/km or over is £2,175 – so clearly, you can make some big tax savings driving an electric car.
How much is the road tax on a hybrid vehicle?
The rules are slightly different for plug-in hybrid electric cars. Hybrid vehicles tend to have lower emissions, because of their improved efficiency – but they’ll still attract a charge.
Unlike fully electric vehicles, hybrids pay a first-year charge (based on their emissions). In each year after that, all hybrid vehicles are eligible for the “Alternatively Fuelled Vehicle” charge – which is currently £140.
The table below shows what you can expect to pay in the first year.
Table 3: Hybrid Vehicle road tax in the first year:
|CO2 emissions||First year charge|
Charging vs fuel tax benefit
Rising petrol and diesel costs make switching to an electric car a very smart move indeed. If you’re a domestic electric car user, you’ll only pay 5% in tax when you swap petrol or diesel for electricity. And even though business users pay a slightly higher 20% tax on electricity, there’s no fuel duty tax on electricity, like there is for petrol and diesel.
Direct Line Insurance1 did the maths on an average traditional petrol-fuelled car and its EV equivalent. Annually, the petrol car cost £824 to run – but the EV cost less than half that, at just £343 to charge.
In fact, the average company car driver, travelling 18,400 miles a year, could save over £1,000 each year by switching to an electric car2. Find out more about how far electric cars can go on one charge, in our helpful guide.
Even hybrids can save money on fuel costs, as they use around 30% less fuel per mile than conventional cars3.
Learn more about the running costs of EVs in our complete guide to buying, charging and running an electric car.
Workplace charging tax exemptions
The “OLEV Grant'' refers to a government grant offered by the Office for Low Emission Vehicles. The grant itself is called the Electric Vehicle Homecharge Scheme (EVHS). It gives up to £350 off the cost of purchasing and installing an EV charging point at home.
With the OLEV Workplace Charging Scheme grant, you can get a grant to help cover the cost of vehicle charging points at your workplace. The grant reduces the purchase and installation cost of electric vehicle charging points for the workplace by 75% – and up to £350 (including VAT) per socket. Companies can claim up to a maximum of 40 sockets – which could potentially save up to £14,000.
Find out more about electric car grants and incentives here. Then learn more about the OLEV charging grant for EVs, in our complete guide.
Sources and references
2. Average number of miles by a company car is 18,400 in 2019 (Source: https://www.racfoundation.org/motoring-faqs/mobility#a25)