Electric Cars and Tax Benefits for Owner Managed Businesses

UK Tax Treatment of Purchasing an Electric Company Car via a Private Limited Company

Purchasing an electric car through a private limited company can offer significant tax benefits, but the treatment depends on the method of acquisition. Below is a breakdown of the tax implications for different financing options:

1. Purchasing Outright via the Company

Key Tax Benefits

✅ Corporation Tax Relief –

  • 100% First-Year Capital Allowance (FYA) – The full cost of a new and unused electric car can be deducted from taxable profits in the year of purchase.
  • Example: If your company buys a £50,000 electric car, you can deduct £50,000 from taxable profits, saving up to £12,500 in Corporation Tax (assuming a 25% tax rate).

✅ VAT Reclaim –

  • If used solely for business, 100% VAT reclaimable.
  • If used personally, no VAT reclaim allowed.

🚗 Benefit-in-Kind (BIK) Tax –

  • Low BIK rate for electric cars: 2% in 2024/25 (based on the car’s list price).
  • Directors/employees pay income tax on the BIK value, and the company pays Class 1A NICs (13.8%) on it.

Best for: Businesses with high taxable profits looking for an upfront tax deduction.

2. Personal Contract Purchase (PCP)

(Purchased Personally & Used for Business)

🚫 No Corporation Tax Relief – Since the car is owned personally, the company cannot claim capital allowances.

✅ Mileage Allowance Instead – The company can reimburse you for business mileage at 45p per mile (first 10,000 miles), then 25p per mile tax-free.

✅ No BIK Tax – If the company does not own the car, there’s no BIK tax.

❌ No VAT Reclaim – VAT on personal purchases cannot be reclaimed.

Best for: Directors/employees who mostly use the car personally and want to avoid BIK tax.

3. Hire Purchase (HP) via the Company

(Company Owns the Car at the End)

✅ Corporation Tax Relief – Treated like an outright purchase:

  • 100% FYA available for new electric cars.

✅ VAT Treatment –

  • If the car is used exclusively for business, 100% VAT reclaimable.
  • If any personal use, no VAT reclaim.

🚗 BIK Tax Applies – Same as outright purchase.

📌 HP vs. Outright Purchase? – HP allows tax relief in full even though payments are spread over time.

Best for: Businesses wanting full tax relief upfront but preferring to spread payments.

4. Leasing via the Company (Contract Hire)

(Company Does NOT Own the Car)

✅ Corporation Tax Relief –

  • Lease payments are fully deductible against Corporation Tax, provided there’s no personal use restriction.

✅ VAT Reclaim –

  • 50% of VAT on lease payments reclaimable if there is personal use.
  • 100% VAT reclaimable if solely for business.

🚗 BIK Tax Applies – Similar to outright purchase.

❌ No Ownership – The company never owns the car, so no asset value on the balance sheet.

Best for: Companies that prefer lower upfront costs and fixed monthly expenses.

Summary: Best Options Based on Tax Efficiency

Purchase Method Corporation Tax Relief VAT Reclaim BIK Tax Ownership
Company Outright Purchase 100% First-Year Allowance 100% (if no personal use) Yes (2% BIK) Yes
Personal PCP No No No Yes
Company Hire Purchase (HP) 100% First-Year Allowance 100% (if no personal use) Yes (2% BIK) Yes (after final payment)
Company Lease (Contract Hire) Monthly lease payments deductible 50% (if personal use) Yes (2% BIK) No

Which Option is Best for You?

  • If you want full tax relief upfront → Company Outright Purchase or HP.
  • If you want predictable monthly costs → Leasing.
  • If you want to avoid BIK tax and use the car personally → Personal PCP with mileage allowance.