The tax advantages of buying an electric car

Electric vehicles (EVs) are not only a great choice for the environment – they also come with a range of tax benefits that can make them financially attractive. Whether you're employed, run a business, or are self-employed, there are several ways you can benefit.

Listed below are some key scenarios:

1. Employed individuals

If you're employed, a salary sacrifice arrangement can be a smart way to finance an electric car. Here's how it works:

• Salary sacrifice: You agree to give up part of your pre-tax salary in exchange for a non-cash benefit, such as an electric car. This reduces your taxable and pensionable income, which lowers the amount of tax and pension contributions you pay.
• Tax savings: The amount sacrificed comes off your gross salary before tax, so you pay less income tax and National Insurance.
• Benefit in Kind (BIK): Electric cars attract a lower BIK rate than petrol or diesel models. For the 2025/26 tax year, the BIK rate for fully electric cars is 3%. This will rise by 1% in both 2026/27 and 2027/28. The BIK is calculated based on the vehicle’s list price.
• Potential drawbacks: Because the cost comes out of your salary, your take-home pay is reduced, which can affect affordability checks for things like mortgages. When the arrangement ends, your pensionable income increases again, which could lead to an annual allowance tax charge. And since the car is linked to your employer, you’d lose access to it if your employment ends.

2. Purchasing through a company

If you run a business, buying an electric car through your company can offer meaningful tax advantages:

• Benefit in Kind (BIK): As above, electric company cars come with a low BIK rate, which reduces the personal tax liability for employees and directors using the car.
• Corporation tax relief: Companies can claim 100% first-year capital allowances on new electric cars, allowing the full cost to be deducted from profits before tax.
• Running costs: The company owns the car and is responsible for running costs, such as insurance, road tax, repairs and maintenance.
• Potential drawbacks: As the company owns the car, obtaining finance may be harder and potentially more expensive than a personal loan. The company benefits from tax relief, but the employee or director still faces a BIK tax charge, albeit at a low rate.

3. Self-employed individuals

If you’re self-employed, there are two main ways to claim tax relief on an electric car:

• Capital allowances: Like companies, self-employed individuals can claim 100% first-year capital allowances on new electric cars, if the car is used solely for business. For second-hand cars, the allowance rate is 18%.
• Running costs: You can claim the running costs, including charging, for the proportion of business use.
• Mileage basis: Alternatively, you can claim mileage allowances for business travel. The approved mileage rates for electric cars are 45p per mile for the first 10,000 miles and 25p per mile thereafter. This method may be simpler and more beneficial if you drive a lot for work.
• Potential drawbacks: To claim capital allowances and running costs, you’ll need to keep detailed records of costs and business usage throughout the year, which can be time-consuming. When the car is sold, you’ll also need to adjust for average business use. If usage is high in the first year and later falls, this can lead to a tax charge on disposal.

Need help?

The tax benefits of buying an electric car can be substantial, whether you're employed, self-employed or running a company. To make the most of the available reliefs – and avoid any unexpected tax implications – speak to our team.

Get in touch with your usual Larking Gowen contact or email enquiry@larking-gowen.co.uk

George Crowe