In the government’s push for a greener environment, generous tax incentives have been introduced to encourage employers and the self-employed to transition to electric and low emission vehicles.

Benefit in Kind (BIK) tax

You will be charged BIK tax if you receive perks in addition to your salary, as part of your remuneration package. The percentage of the list price of a company car that is taxed as a BIK, and is determined by the CO2 emissions of the vehicle and the date the vehicle was registered. As a general rule, the newer the car, the lower the CO2 emissions need to be to reap the maximum tax benefits.

In 2019/20, low emission cars (up to 50g/km) were taxed at 16% of the list price (20% for diesels). As electric cars tend to be more expensive than similar-sized petrol or diesel cars, there was little incentive at the time for your employer to provide electric-only company cars. However, from 6 April 2020 to the end of the 2020/21 tax year (5 April 2021), full battery electric vehicles (BEVs) paid a zero BIK rate, which also applied to hybrid vehicles with emissions from 1-50g per km that have an electric mile range of 130 miles or more. This was a significant reduction – particularly for high-value electric cars, such as Tesla.

The BIK rate increased to 1% from 6 April 2021 and has been increased to 2% in the current 2022/23 tax year, but will be frozen at 2% through to April 2025 - a rate which still offers you substantial tax savings compared to petrol or diesel vehicles, which typically have a BIK rate between 18% and 37%.

Fuel tax

BIK tax is also charged on employer-provided fuel for private use. As electric cars don’t use fuel, there’s no fuel benefit charge at all. Better still, if you use your own electric cars you can utilise workplace charging stations without incurring a BIK tax charge, even where the vehicle is used for private use.

To illustrate, if your employer provided a petrol car in 2022/23, listed at £20,000 with CO2 emissions of (say) 120g/km, you would attract BIK tax of £5,800 and a fuel benefit charge of £7,337. An electric car with the same value would attract BIK tax of only £400, and no fuel benefit. A significant difference!

What if you’re self-employed?

The tax favourable incentives of low emission cars have been in place for self-employed individuals for some years now. Currently, 100% first year allowances (FYAs) are available on brand new and unused low emission vehicles (with 0 CO2 emissions) purchased for business purposes, which effectively reduces your taxable profits by the cost of the car. If the vehicle does not produce zero emissions relief is given at 18% for CO2 emissions between 1 – 50g/km and at 6% for emissions above this limit.

Why make the change now?

The decision to transition to electric cars is no longer just a matter of social responsibility. If you’re not ready just yet, as a potential BIK tax increase is not expected until the 2025/26 tax year, you have time to consider your options.