What are the tax breaks for electric company cars?

Fleets and businesses are responsible for almost half of all new car registrations in the UK, and the government has 20 years using company car tax to encourage drivers to choose vehicles with the lowest CO2 emissions.

Company car tax incentives have helped stimulate demand for diesel and hybrid cars, but by far the most generous financial breaks are reserved for electric vehicles and it’s proving influential. In fact, the SMMT says two thirds of 2022’s new electric cars were registered to fleets and businesses. Here’s how it works.

How much tax will I pay for an electric company car?

Company cars are one of the most desirable perks for employees, providing access to a (usually) brand new and fully maintained vehicle that’s also available outside work hours. Unfortunately, this doesn’t come for free. If you’re using a company-owned car for private journeys then HMRC class it as a Benefit-in-Kind (BiK), and you’ll be taxed for doing so. 

Autocar’s company car tax calculator shows exactly what you’ll pay for every make and model

Several factors affect the size of that tax bill, but the biggest influence is the car’s CO2 emissions. Company cars are taxed based on what’s called a ‘taxable value’ – which is a percentage of their list price, weighted against vehicles that emit the most CO2 at the tailpipe. 

Although electric vehicles have a higher list price than their petrol or diesel counterparts, they are rated at 0g/km CO2 and fall into a much lower tax band.

Company car tax bands are currently frozen until April 2025, which means drivers are taxed on just 2% of the list price if they choose an electric vehicle. That compares to 25% or higher for even the most efficient petrol, diesel or so-called ‘self-charging’ hybrid models. 

Although the tax bands will increase every April from 2025 onwards, in line with the new financial year, HM Treasury has confirmed that those incentives will remain in place until at least 2028. 

The following table shows some examples, based on the 2022-2025 tax bands:

Drivers’ annual Benefit-in-Kind payments are a percentage of the taxable value, which matches their income tax rate. England, Wales and Northern Ireland use three bands (20%, 40% and 45%), while Scotland has five (between 19% and 46%). For example, a 20% taxpayer would pay 20% of the taxable value each year, split equally across their payslips. 

Continuing the examples above, an electric car could reduce a driver’s tax bill by between 90 and 95%. 

How are fleets being incentivised to use electric cars?

HM Treasury hasn’t overlooked the extra costs for fleet operators. An electric car is usually more expensive to lease than an equivalent petrol or diesel model, but there are several tax incentives in place to tip the business case back in their favour.

Unlike a combustion engine car, businesses can deduct the full cost of buying or leasing an electric vehicle from their pre-tax profits, resulting in lower tax bills. 

They also qualify for zero-rate Vehicle Excise Duty (VED, or ‘road tax’) and are exempt from the levy (currently £355) that’s applied if the list price is £40,000 or more. VED exemptions will be withdrawn in April 2025, and backdated to vehicles that are already on the road. 

Recurring tax costs are lower too. Employers pay Class 1A National Insurance Contributions (NICs) for providing workplace perks. These are paid at a flat 13.8% of the taxable value, which means it’s just as heavily CO2-weighted as drivers’ Benefit-in-Kind payments.