For businesses, choosing the right vehicle is a critical decision with far-reaching financial implications. Beyond operational needs, the type of vehicle you choose can significantly impact your tax liabilities. This comprehensive guide, brought to you by chartered accountants in Rotherham, explores the tax implications of electric cars, hybrid vehicles, petrol cars, and commercial vehicles. It also includes an in-depth discussion of vehicle classifications for tax purposes and examines changes from the Autumn 2024 budget.
Whether you’re managing limited company accounts or seeking advice from the best accountants in Rotherham, understanding vehicle tax rules can ensure maximum savings.
Tax Considerations When Purchasing Vehicles
The tax implications of a vehicle depend on several factors:
- Corporation Tax Relief: The type of capital allowances available, such as the 100% Annual Investment Allowance (AIA) or writing-down allowances.
- VAT Recovery: Whether VAT can be reclaimed on the purchase or running costs.
- Benefit-in-Kind (BIK): The personal tax costs for employees who use the vehicle for personal purposes.
The interplay of these factors varies significantly depending on whether the vehicle is electric, hybrid, petrol, or diesel and whether it is classified as a commercial vehicle.
Electric Cars: Maximum Tax Efficiency
Electric cars are a popular choice for businesses due to their tax advantages and environmental benefits.
- Corporation Tax Relief:
New electric cars qualify for a 100% First-Year Allowance (FYA), enabling businesses to deduct the full cost of the vehicle in the year of purchase. However, this applies only to new vehicles. Second-hand electric cars qualify for an 18% writing-down allowance, meaning you can deduct 18% of the car’s value annually. - Benefit-in-Kind (BIK):
Electric cars are highly attractive for employees, as their BIK rate remains at just 2% for the 2024/25 tax year. This is set to rise by 1% per year until 2028 (3% for 2025/26, 4% for 2026/27 etc), making electric cars cost-effective for both the business and the employee. - VAT Recovery:
VAT on electric cars is not reclaimable unless the vehicle is used exclusively for business purposes, which is rare for passenger vehicles.
Example:
A Tesla Model 3, priced at around £42,000, is a great option for businesses seeking tax efficiency. As a new electric car, it qualifies for the 100% FYA. This allows a company to claim £10,500 in corporation tax relief (at a 25% tax rate) in the year of purchase. Additionally, the Tesla’s low BIK rate (2%) significantly reduces employee tax burdens, making it a win-win for both the company and employees.
Hybrid Cars: A Balanced Choice
Hybrids combine combustion engines with electric motors, offering a middle ground between petrol and electric cars.
- Corporation Tax Relief:
Hybrids with CO2 emissions below 50g/km qualify for 100% FYA, while higher-emission models attract an 18% writing-down allowance. - Benefit-in-Kind (BIK):
Hybrids are often chosen for their moderate BIK rates, which depend on their emissions and electric-only range. Rates start as low as 2% for low-emission hybrids but can rise to 37% for models with higher emissions. - VAT Recovery:
Similar to electric cars, VAT on hybrids is generally blocked unless the vehicle is used exclusively for business.
Example:
A plug-in hybrid costing £40,000 with emissions under 50g/km and a 40-mile electric range might have a BIK rate of 8%, offering employees an affordable benefit while providing environmental benefits.
Petrol Cars: The Traditional Option
While petrol cars are widely available and familiar, they are less tax-efficient than electric or hybrid options.
- Corporation Tax Relief:
Petrol cars qualify for either an 18% or 6% writing-down allowance, depending on their CO2 emissions. High-emission petrol vehicles (over 50g/km CO2) fall into the lower category, which can significantly extend the time it takes to claim full tax relief. - Benefit-in-Kind (BIK):
Petrol cars attract high BIK rates, ranging from 14% to 37%, making them expensive for employees who use them privately. - VAT Recovery:
Similar to hybrids and electric cars, VAT is blocked for petrol cars unless used exclusively for business.
Example:
A £30,000 petrol car with emissions over 50g/km would yield only £1,350 in tax relief annually under the 6% writing-down allowance.
Commercial Vehicles: Favourable Tax Treatment
Commercial vehicles, whether diesel or electric, offer more straightforward tax savings.
Electric Commercial Vehicles
- Corporation Tax Relief:
These vehicles are treated as plant and machinery, qualifying for the 100% Annual Investment Allowance (AIA). - Benefit-in-Kind (BIK):
Electric commercial vehicles have a 0% BIK rate, making them ideal for employee use without additional personal tax costs. - VAT Recovery:
Full VAT recovery is available for vehicles used exclusively for business purposes.
Diesel Commercial Vehicles
- Corporation Tax Relief:
Diesel vans also qualify for 100% AIA, enabling businesses to deduct the full cost of the vehicle. - Benefit-in-Kind (BIK):
These vehicles are charged at the same flat rate of £3,960 for BIK and will rise to £4,020 for the 2025/2026 tax year. - VAT Recovery:
Businesses can reclaim VAT on diesel commercial vehicles, provided they are used solely for business.
Example:
A £40,000 diesel van would result in £10,000 in corporation tax savings (at a 25% tax rate), with a £3,960 BIK charge for employees.
What Classifies as a Commercial Vehicle?
- For Corporation Tax:
Commercial vehicles must primarily be designed to carry goods. Examples include vans, lorries, and vehicles with a payload exceeding one tonne. However, starting April 2025, double cab pickups may be reclassified as cars unless they predominantly carry goods, reducing their tax efficiency. - For VAT:
VAT rules for commercial vehicles differ slightly. Vehicles must meet the one-tonne payload criterion and not be primarily designed for passenger use. Businesses can recover VAT fully if the vehicle is used exclusively for business purposes.
Changes from the Autumn 2024 Budget
The Autumn 2024 budget announced significant changes effective April 2025:
- Double Cab Pick-Ups:
From April 2025, these vehicles will be classified as cars for both BIK and capital allowances unless they predominantly carry goods. This will increase their BIK rates and reduce corporation tax relief. - Benefit-in-Kind (BIK):
Electric vehicles retain their 0% BIK rate until 2028, maintaining their status as the most tax-efficient option for employee use.
Businesses should act before April 2025 to take advantage of current allowances and avoid future restrictions.
Please see our earlier blog post for more details on the changes from the Autumn 2024 Budget.
Optimising Your Vehicle Tax Strategy with Chartered Accountants in Rotherham
Choosing the right vehicle for your business requires careful consideration of corporation tax savings, VAT implications, and personal tax consequences. By consulting with the best accountants in Rotherham, you can align your vehicle purchases with the latest tax rules to maximise savings.
For expert advice on managing limited company accounts and understanding complex tax laws, contact chartered accountants in Rotherham today