If you’re running a business that puts cars through your company, you’ve probably seen your taxes growing every year.
And with the recent ruling against Coca-Cola and their fleet of modified vans, almost every company director is starting to rethink their car tax situation.
For some companies, that might mean cutting back on buying new cars – or making changes to their employee benefits.
But for others, it’s a chance to explore new ways of saving money. And one of the most promising ways to reduce your taxes could also be one of the most environmentally friendly changes your company makes.
So how does an eco-friendly company car affect your taxes?
Let’s get into it…
How does tax relief work for company cars?
When you’re using a car for business or work, you can usually claim expenses for the miles you travel.
But if you’re talking about buying a car through your business, there’s one big saving you might be able to make that’s in corporation tax which is tied to the value of the car itself – and that’s claiming capital allowances.
So how does it work?
In theory, it’s simple. When you buy a car to use in your business, you can deduct part of the value of the car against your profits – which means reducing the total amount of tax you’ll have to pay.
But in practice, it’s a little more tricky. And the amount you can deduct depends heavily on the type of car you buy.
What are the tax incentives for electric cars?
The biggest tax incentives come with the cars that are the most environmentally friendly.
Specifically, that means cars with a CO2 emission of 50 grams per kilometre or less can be used to claim the full value of the car against your profits for the year (assuming it’s bought new after April 2018).
So if you’re thinking about buying a fully electric car (which means zero CO2 emissions) you’ll automatically fall into the category that can claim the highest capital allowances – and it should give you the highest saving in terms of corporation tax.
And as an added bonus: buying a zero-emission car means you won’t be charged any benefit-in-kind tax for the year 2020/21 – and that charge will rise to just 2% in 2022/23.
But watch out: this full-value capital allowance tax relief only counts for low-emission cars when you buy them new. There’s a separate tax rate for second-hand cars, so make sure you check the full list on the government website before you jump into a decision.
If you lease your car through the business and it is an electric car 100% of the lease costs can be offset against your profits saving corporation tax.
Are there any tax advantages for hybrid cars?
Electric cars are great for the environment. But they’re not for everyone – and despite the huge ongoing improvements in electric car technology, some people are still worried about their range, and the availability of charging stations.
So instead, some people are choosing to buy a hybrid car. And while they might not save you as much tax as an electric car, they could still be a huge improvement over a traditional gas guzzler.
Unlike an electric car, a hybrid car still comes with a benefit-in-kind tax to pay. But the electric side of the car has been taken into account. In general, that means cars with a longer electric range have a lower benefit-in-kind tax attached to them.
And just like any other type of car, hybrid cars follow the same capital allowances rules when it comes to their CO2 emissions. So if you choose a hybrid car that hits the emission breakpoints, you’ll be able to claim more of the car’s value against your profits.
If you lease your cars 100% of the lease costs can be deducted from your profits if the CO2 emissions are 110g/kg or below.
So what does that all mean in terms of costs?
If you want the short answer, it’s this:
The more eco-friendly your business car is, the more you’ll potentially save in terms of taxes.
That’s a useful rule of thumb to keep in mind. But there’s a lot more to compare when you get down into the numbers.
So to make things easier, we’ve done the maths for you.
These examples are based on a VAT-registered business with the owner taking dividends at the basic rate of tax to cover the lease payments. We’ve taken the leasing costs from online quotes at Select Car Leasing, and tax rates from the government website for the three tax years ending 2020-2022 – all of which were valid as of September 23, 2020.
These numbers are just a guide to give you a general idea of the differences in costs – and you should always make specific comparisons yourself before you jump into any buying decisions!
What does an electric car cost in taxes?
If you put a Long Range Tesla Model 3 electric car through your business, you should expect to pay around £300 in benefit-in-kind taxes over the next three tax years (or around £600 if you’re a higher-rate tax payer).
If you leased a Tesla Model 3 Long Range through your company, it would cost around £5,600 per year – compared to a cost of around £8,100 per year if you were to lease it personally.
(These numbers are for a basic rate tax payer, after calculating the taxes due and any corporation tax relief).
So if you lease an electric car through your business – as opposed to leasing it personally – you could see potential tax savings of up to £2,500 per year.
What does a hybrid car cost in taxes?
If you put a Land Rover Discovery Sport hybrid car through your business, you should expect to pay around £3,100 in benefit-in-kind taxes over the next three tax years (or around £6,200 if you’re higher-rate tax payer).
If you leased that same car through your company, it would have a net cost of around £7,300 per year – compared to a net cost of around £8,300 per year if you were to lease it personally.
So if you lease a hybrid car through your business rather than leasing it personally, you could see potential tax savings of up to £1,000 per year.
So what’s the answer?
Unfortunately, there’s no one-size-fits-all approach. Every business is different, and so is their tax situation.
Putting your car through your business can come with huge potential tax benefits. But it’s not always easy to crunch the numbers and get to a direct comparison.
So if you’re looking for reliable tax advice that could save you and your business money, it helps to have an experienced accountant by your side – giving you the tax-savvy guidance you need to be confident in every buying decision you make. Contact us today, for more financial advice.