At a glance
- 80% of small businesses want to improve sustainability, with many investing in EVs—making up 75% of UK EV sales in 2023.
- Businesses can access grants, VAT relief, and 100% capital allowances on new EVs and charging points to offset high upfront costs.
- EV salary sacrifice schemes offer tax savings for employees, but firms must manage impacts on pensions and future tax changes.
- While current EV BiK and vehicle tax rates are low, upcoming policy changes (from April 2025) will increase costs, requiring careful planning.
The push to go greener isn’t passing small businesses by, with a Small Business Britain and BT study finding that 80% want to improve their sustainability.
Many are already taking positive steps, according to a study from T&E UK, through investing in electric vehicles. Three quarters of all EVs sold in the UK in 2023 were corporate, and they made up just under a quarter (22%) of new corporate car registrations in the same year.
In February the government announced that it is putting aside £120 million in funding to make the switch to cleaner business vehicles easier, faster and cheaper for businesses. Drivers, cabbies and businesses can claim grants for purchasing EVs, with the amount available varying depending on the type of vehicle.
EVs can be expensive – about £46,000 on average – but there are reliefs and incentives in place to encourage more businesses to invest in them. By taking full advantage of these, for many the overall cost could end up being lower than that of a traditional vehicle.
Salary sacrifice schemes
For Lorna Macpherson, Motor Finance Expert at Ocean Finance, EV salary sacrifice schemes are becoming increasingly popular. They allow employees to lease an electric car before tax and National Insurance deductions, making it a more affordable option.
The leasing deductions are made pre-tax, which means employees can keep more of what they earn whilst benefiting from use of the EV.
However, she warns: “Businesses need to get the setup right, as these schemes can affect pension contributions and other benefits.” Because salary sacrifice reduces an employee’s gross salary, it may result in lower pension contributions and a reduced future retirement income, particularly for those on defined benefit pension schemes.
Macpherson adds: “The low BiK rate makes them attractive now, but firms should consider future tax changes.”
Company car tax implications
Employees leasing a car through a salary sacrifice scheme must pay a Benefit-in-kind (BiK) contribution, imposed on those who receive benefits in addition to their salary. The BiK rate for EVs is set to rise to 3% in April, from the current 2%.
Macpherson says this is “a huge tax-saving opportunity for businesses and employees alike”. However, she adds that change is coming. “The BiK rate will increase 1% year by year, until 2027 when it will reach 5%. It will then increase by 2% year on year to 9% in 2029,” she says.
Despite this rise the tax still heavily favours electric cars, with the highest BiK rate for petrol or diesel vehicles still 37%.
VAT considerations
VAT on electric cars follows the same rules as other vehicles in the UK, says Jordan Burnard, a tax lawyer at Freeths. There is a 20% VAT charge on the purchase or leasing of electric cars, whether they are fully electric or hybrid.
Burnard adds: “Companies can reclaim VAT on new electric cars if the vehicle is used purely for business purposes and not personal use.”
He warns that commuting to and from the workplace counts as personal use, and VAT cannot be reclaimed for this. “Businesses must ensure that they comply with VAT rules and accurately track the usage of electric vehicles to reclaim VAT.”
Capital allowances
The government announced in the 2024 Autumn Statement that businesses can claim 100% first-year capital allowances (FYA) on new electric cars. This applies for corporation tax purposes until 31 March 2026 and for income tax purposes until 5 April 2026.
Electric vehicle charging points are also eligible for 100% FYA, allowing businesses to deduct the full cost of installing new charging equipment in the year of purchase.
Macpherson explains: “That means the full cost can be deducted from profits in the first year, cutting corporation tax bills. However, this applies only to brand-new EVs, not second-hand ones. If a business opts for used EVs, they’ll have to claim lower allowances over several years.”
“Right now, [BiK is] 3%, compared to much higher rates for traditional cars. That’s a huge tax-saving opportunity for businesses and employees alike.”
Lorna Macpherson, Motor finance expert, Ocean Finance
What’s next for EV tax policy?
Tax policy on EVs is constantly being updated, and not all of it is directly in favour of EVs. From 1 April 2025, EV owners will pay vehicle tax the same as petrol and diesel vehicles. Says Burnard, “The removal of certain exemptions, such as the road tax exemption for EVs, will impact the overall cost-effectiveness of electric vehicles.”
From 1 April 2025, EV owners will pay a £10 first-year vehicle tax, then £195 annually. The standard rate for light goods vehicles will apply to electric vans, and for electric motorcycles and tricycles the smallest engine size rate will apply.
The government is taking steps to encourage EV adoption, but navigating the complexities as policies evolve can be challenging. Accountants need to be on top of all the different tax breaks and incentives to ensure that their clients’ investment into EVs is as efficient as possible, playing their part in accelerating towards a cleaner, greener future.
The IFA tax series focuses on a number of tax topics and features speakers who are experts within the industry. More information here.
