Tax Relief – and Tax Charges – for cars is an area of confusion, and electric cars add some more variables.
Cars and Tax – The Basics
Firstly, there are three very different regimes to think about with cars and businesses:
- Sole Traders and Partners – their own car
- Company Directors and Employees – using their own car
- Company Directors and Employees – employer provided car
As a reminder, company directors are employees of their respective company, hence the regime is the same as for an employee.
If a sole trader or partnership provides a car to an employee, then this is also treated as an employer provided car (distinguished from the sole trader’s or partner’s own car).
For Sole Traders and Partners, there are two main choices when it comes to vehicle expenses in respect of their own car:
- You can claim the business proportion of all running costs – fuel, insurance, road tax, repairs – plus Capital Allowances, emissions based, towards the capital cost of the car, again apportioned. The business proportion is simply business miles as a proportion of total mileage, remembering that journeys to a regular place of work don’t count as business.
- As an alternative you can claim a mileage allowance against tax – 45p per mile for the first 10,000 business miles each tax year, and then 25p per mile for anything over 10,000 miles in that same tax year.
For Company Directors and Employees using their own car, again a mileage allowance can be claimed against tax – at the same rates as above.
When the car is owned by the Employer – including the company for company directors, and by a sole trader or partnership for its employees – then the position is more complicated:
- Employer can get a tax deduction for all running costs and, if provided, fuel
- Employer can claim Capital Allowances, emissions based, towards the capital cost of the car
- Employee is subject to Income Tax on a Benefit in Kind (BIK) based on the original list price of the car and its emissions
- Employer pays Class 1A Employers NI on the same BIK amount
Eg supposing an employer provides a car to an Employee or Company Director. Car has a list price of £35,000 when new, petrol powered, and emissions of 150 g/km. At that emissions level the BIK for 2025/26 is 36% so £35,000 x 36% = £12,600 BIK which is taxed at marginal rate, making a liability of £2,520 for a Basic Rate tax payer or £5,040 for a Higher Rate tax payer.
- If fuel is provided for private use then a further BIK applies, at a standard rate of £28,200 (2025-26) x the percentage from the emissions table, so on the example above 36%, making a fuel benefit of £10,152 which is taxed at marginal rates for the employee/director, and subject to Class 1A Employers NI.
The BIK means in many cases a company director will prefer to own their own car and claim mileage.
How does this change with electric cars? Some aspects remain the same, others change reflecting both government policies to encourage low emissions cars and the practical differences around charging by electric.
Capital Allowances – Electric Vehicles
For petrol or diesel powered vehicles Capital Allowances are spread over a number of years, based on emissions, currently 18% where the emissions are 50 g/km or lower, or 6% where emissions are over 50 g/km.
Hybrids are included in this category, normally benefiting from the higher percentage as they will have a low emissions level.
For brand new and unused electric vehicles with zero emissions, a 100% First Year Allowance is available, which writes off the full cost of the vehicle in the year of purchase. In the October 2024 budget this was extended until the end of the 2025-26 tax year – after then it may be extended further to help towards net zero policies, or there may be an intermediate Capital Allowance rate between 100% and 18%.
If you buy a used (second hand) electric vehicle, then the rate is 18%.
With the lower standard rates of Capital Allowances – 18% and 6% – it takes several years to get the full Capital Allowance, whereas the 100% allowance on zero emission vehicles front loads it, Bear in mind however that, if 100% allowances are given, then some will be clawed back on any residual value if/when the vehicle is sold.
Capital Allowances apply both to cars owned by sole traders and partners, and to cars owned by companies for directors or employees. In the case of sole traders and partners, they need to be apportioned for business versus private use.
100% Capital Allowances also apply to the installation of charging points, again up to the end of the 2025/26 tax year.
Deducting Running Costs
The rules relating to deducting insurance, servicing and repairs are the same for electric vehicles versus petrol or diesel powered vehicles.
For sole traders and partnerships the same apportionment principles apply.
Benefit in Kind – Provision of Car
The BIK % on electric cars is much lower.
For 2024-25 it is 2%, rising to 3% 2025/26, 4% 2026/27, 5% 2027/28.
This compares to the 36% rate used on a petrol car in the example earlier in this guide, meaning the BIK is much lower for both the employees’/directors’ Income Tax and for the employer’s Class 1A NI.
BIK only applies to (a) cars owned by a company and made available to Directors and (b) business (including unincorporated businesses) owned cars made available to employees. BIK is not relevant to sole traders and partners in respect of their own cars.
Benefit in Kind – Charging
In most cases there is no BIK on the electric used for personal use of an employer provided car. This compares to the BIK of £28,200 for diesel or petrol provided for personal use.
Where an employer provided car is charged at the employee’s home, an appropriate reimbursement can be made tax free for the electric. This needs to be restricted to actual cost to avoid a Benefit in Kind.
If the employee charges their own car at the workplace, this is free of BIK.
In some circumstances, a BIK can arise regarding charging:
- Employer provides charging at the employee’s home for the employee’s own car
- Employer pays for non-workplace charging for the employee’s own car
Charging and Electric Costs
For a Sole Trader or Partner charging their car at home, an apportionment of the home electric bill can be claimed against tax.
Businesses can deduct electricity costs for charging in the workplace in the same way as any other expense.
Any reimbursement made to employees for charging can be deducted in the same way as any other employee expense.
VAT
In general the rules around electric cars and VAT are the same as for petrol and diesel cars. VAT registered businesses can recover VAT on running costs, but not on the cost of purchasing a vehicle. 50% of VAT charged on a car lease can normally be claimed by VAT registered businesses
Summary
As we said at the outset, tax relief – and tax charges – for cars is an area of confusion, and electric cars add some more variables.
With electric cars, the main differences are:
- Accelerated capital allowances – 100% on a new vehicle (18% on used), versus 18% or 6%.
- Much lower BIK on employer provided cars.
- No BIK on employer funded electric charging for private use, whereas large BIK on petrol or diesel for private use.