Profit Extraction and Electric Company Cars
Our third blog this tax year on the subject of profit extraction for business owners. Our first covers taking earnings as Salary vs Dividends, and our second covered using company pension contributions. This blog discusses using electric company cars as another potential way for a business owner to efficiently extract profits.
Running a vehicle(s) will normally be one of the more significant areas of expenditure for a family. A business owner has the option of funding this personally or through their business.
For may years now, running a conventional petrol or diesel car through a business has been very tax inefficient. We’ve come across business owners wasting thousands of pounds of tax a year doing this, when it would’ve been far cheaper to buy or lease a car personally. This blog sets out the basics of the company car tax system and how penal it is for traditional petrol/diesel cars.
Benefit In Kind (BIK)
If a company provides a car for an employee’s personal use, a proportion of its new list price is treated as a benefit-in-kind (P11D value) earned by the employee. The proportion is based on the CO2 emissions of the car. There are various rules governing partial/restricted use and employee contributions amongst other things.
For an electric vehicle, that proportion is currently just 2%. So, if your company provides you with a £50,000 electric car you are taxed as if you only earnt 2% of this amount i.e. £1,000. This is the case whether the company has leased the car or bought it outright.
The company can also pay the costs of insurance, servicing and maintenance. These costs should also be corporation tax deductible for the company – brand new electric car purchases currently get a 100% first year allowance.
This means an electric company car can currently be provided almost free of tax.
The BIK tax rates have been confirmed for the next four tax years, remaining at 2% for 2024/2025 before rising 1% each year to reach 5% by 2027/28.
Plug-In Hybrids (PHEVs)
A battery electric vehicle will not necessarily be for everybody right now. A Plug-In Hybrid car has a battery and electric motor for some electric running and a combustion engine (usual petrol) to take over thereafter.
Such cars have a (BIK) rate based on the amount of electric only miles(1) they can cover. A typical PHEV which can cover 30-39 miles on the battery has a BIK rate 10% higher than a pure electric vehicle – currently 12%.
For comparison most petrol/diesel cars have BIK rates between 27% and 37%!
Total Cost Comparison: Company Electric Car vs Personal
For many business-owners, getting an electric company car would be an alternative to personally owning a petrol/diesel car (given penal tax treatment as company cars).
Below we attempt to compare the total costs of the two options. Obviously this requires a lot of assumptions and the reality for each business owner will depend on their own circumstances and decisions. We’ve just tried to pick sensible numbers for a fair comparison.
The comparison is based on running new cars of a broadly similar size and standard. Obviously if you were running a 10-year-old personal car, the total cost is going to be much lower than in the example, maybe around half as much.
The comparison is based on a 3-year ownership cycle (common for vehicle financing), with 10,000 miles driven yearly for a higher-rate taxpayer (whose company pays the main 25% rate of Corporation Tax).
For ease of comparison, this is based on the company leasing an electric company car. The principles, if not the specifics, do hold when comparing with an outright purchase.
The business owner spends £6,000 per annum on their personal vehicle. This could be in the form of buying outright and incurring depreciation, or through monthly financing costs such as a lease.
The total cost to them of running the car is £8,820 – paid out of net income. For a higher rate payer, the company’s cost of providing that net income is calculated at £17,751. This assumes dividends, allowing for Corporation Tax (as dividends aren’t deductible). The total would be very similar for salary/bonus, once including employer NICs.
With the electric company car, the only personal costs are the electricity used and the Benefit-in-Kind tax, paid out of net income. The other costs of running the vehicle, such as insurance, servicing and maintenance are paid by the company.
We assume the vehicle is for mixed personal and business use and the (VAT-registered) business can reclaim 50% of the VAT on the lease. If this was not the case, the VAT on the lease would be an additional £700 i.e. £1,400 (20%).
We calculate £2,818 would be used in covering the net personal costs of running the car, plus the c. £8,900 costs of the car itself. This gives £11,725 of gross costs.
This is some £6,000 less than with running the personal car. If that £6,000 was instead taken as further drawings, it could provide the business owner with roughly £3,000 of additional net income.
Conclusions
A company electric car is clearly not going to be relevant for every business owner and salary/dividends and employer pension contributions will be the main form of profit extraction for most. However, they can be a tax-efficient way of running a car, particularly where an electric car suits a business owner’s needs, they’re a higher or additional rate taxpayer and they tend to run newer, more expensive models to begin with.
If you wish to discuss your remuneration strategy or another area of business or tax planning, please get in touch and we can see if we can help.
(1) Also depends on having official emission figures of less than 50g C02/km which most do, in order to secure beneficial tax treatment.
Disclaimer
The above is provided for general information only. No action should be taken without seeking advice for your specific circumstances. Collingbourne Wealth Management does not provide tax advice. All information is based on our understanding of current tax rules as at the time of writing, which can is subject to change.
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