With sustainability firmly on everyone’s agenda, more and more individuals are looking at the benefits of electric cars, including tax benefits. Not only does a move to an electric car benefit the environment and reduce fuel costs but it could also provide you with potential tax savings in the year of purchase.
If you are self-employed and own a car that you use for business, you have the opportunity to claim a capital allowance in the first year of ownership. Capital allowances vary depending on emissions, however, for new electric cars the allowance is 100% of the cost of the car (restricted to your business use). This means you can deduct the business element of the cost from your profits before you pay tax.
The allowance on a new electric car is given in the year of purchase, so in a way, it is an acceleration of allowances you might have received over a longer period if you opted for a non-electric car. It doesn’t strictly speaking provide greater tax benefits, just an acceleration. In the year of sale or disposal, there will be a balancing charge equivalent to the sale proceeds, again restricted to business use.
For example, if you bought a new electric car for £30,000 which was used 75% for business purposes in the year, you would be entitled to deduct £22,500 from your taxable profits in that year. Similarly, when you came to sell that car, if you sold it for say £10,000 and in that year were using it only 30% for business purposes you would have a balancing charge of £3,000 (this increases your taxable profits).
As the tax benefits associated with purchasing new electric cars relate to acceleration and timing, there can be opportune years in which to make this change e.g. a year in which profits are higher than usual, or you have lost your personal allowances because taxable income has exceeded £100K. As the allowance reduces your taxable income it will have a similar impact on your superannuable profits. Before making any change, do ensure you fully understand the implications over the period of ownership of the car, and what is meant by business use. Anything which reduces your superannuable profits will also mean a reduction in superannuation contributions for that year, and more importantly, a reduction in your pension eventually.
Many people find that leasing their car suits their circumstances better, with a regular monthly payment, and the opportunity to change their car regularly. Leasing costs can be an allowable business expense, again subject to the business use element. If the car is leased solely for business purposes then VAT is fully deductible, however, if there is any personal use then only 50% VAT is deductible.
So, tax relief for leasing an electric car is given each year depending on the cost and business use, contrasted with outright purchase which provides an initial and one-off tax deduction.
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