Tax Advantages of Electric Cars in the UK

Tax Advantages of Electric Cars in the UK

Electric vehicles (EVs) offer a range of tax incentives for businesses, employees, and sole traders in the UK. These benefits are designed to accelerate the shift to cleaner transport by making EVs financially attractive. While incentives remain generous in 2024–2025, some are set to tighten in the coming years—so understanding what’s currently available is important if you’re planning to buy or lease an electric car through your business.

What Are the Tax Benefits Available to Sole Traders, Employees and Companies?

For sole traders, an electric vehicle used for business can be claimed as a capital expense, with proportionate deductions allowed based on business use. Mileage allowances can also be claimed at the approved HMRC rate (currently 45p per mile for the first 10,000 miles).

For employees, the primary benefit is the low Benefit-in-Kind (BIK) rate on electric company cars, which drastically reduces income tax liability compared to petrol or diesel vehicles.

For companies, electric cars offer major Corporation Tax relief through capital allowances and help reduce Class 1A National Insurance contributions due to the low BIK on employee-provided cars. Leasing electric vehicles can also be an efficient tax option when the business cannot afford outright purchase.

Do Electric Cars Pay Road Tax?

Until April 2025, pure electric cars are exempt from Vehicle Excise Duty (road tax). This exemption includes both the first-year rate and standard rate.

From April 2025, newly registered electric vehicles will begin paying a standard annual VED of £165 (based on current rates), bringing them in line with the lowest-emission petrol cars. Older EVs registered before this date will also lose their exemption.

Do Electric Cars Pay the Congestion Charge?

In London, fully electric vehicles are currently exempt from the Congestion Charge, but only if the driver registers for the Cleaner Vehicle Discount. This exemption is valid through December 2025, after which it will be withdrawn.

Electric vehicles are also exempt from many Clean Air Zones (CAZ) and Ultra Low Emission Zones (ULEZ) across UK cities—offering further operational savings.

What Capital Allowances Are Available on Electric Cars?

Capital allowances allow businesses to deduct the cost of an electric car from their profits, reducing Corporation Tax. The current rules are:

• 100% First-Year Allowance (FYA) is available on brand new, fully electric cars with zero emissions.

• This means a company can deduct the full cost of the vehicle in the year of purchase—if bought outright—not leased.

• Plug-in hybrids or other low-emission cars that emit more than 0g/km do not qualify for FYA and fall under standard Writing Down Allowances of 18% or 6% depending on emissions.

It’s worth noting that the 100% FYA may be removed or restricted in future, so businesses planning to invest in EVs may benefit from acting sooner.

What Is the Benefit in Kind on Electric Cars?

BIK (Benefit-in-Kind) is a tax paid by employees for using a company car for personal journeys. For electric cars, BIK rates remain extremely low compared to petrol or diesel models.

• For 2024/25, the BIK rate on pure electric cars is 2% of the vehicle's list price.

• This rate will rise slowly to 3% in 2025/26, then 4% in 2026/27, and 5% in 2027/28.

By comparison, a petrol company car could attract a BIK rate of 25% to 37% depending on emissions. The difference can be thousands of pounds in annual tax savings for employees and reduced National Insurance for employers.

What Are the Tax Implications of Offering Workplace EV Charging?

If an employer provides free charging at the workplace, there is no Benefit-in-Kind for the employee—even if they charge their own personal electric car. This makes it a highly tax-efficient staff benefit.

Additionally, employers can claim capital allowances on the cost of installing EV charge points. Grants such as the Workplace Charging Scheme (WCS) can also cover part of the installation cost.

If an employer reimburses staff for home charging costs or installs chargers at their homes, different tax rules apply, and it may be treated as a benefit.

Are the Tax Benefits Becoming More Restricted on Electric Cars?

Yes, the tax benefits for electric cars are gradually being reduced as the market matures. Key changes include:

• The introduction of VED from April 2025 for new and existing electric cars.

• A planned increase in BIK rates from 2% to 5% between 2025 and 2028.

• The end of Congestion Charge and ULEZ exemptions for electric vehicles in some areas from 2025 onwards.

• Potential restrictions or removal of 100% First-Year Allowances in future tax years.

That said, electric vehicles will continue to enjoy preferential tax treatment compared to petrol and diesel for the foreseeable future. But the best time to take advantage of the full range of tax breaks is now—before further reductions take effect.

Conclusion

Electric vehicles offer compelling tax benefits for companies, employees, and sole traders—from capital allowances and low BIK rates to exemptions from road tax and congestion charges. With several of these incentives due to tighten over the next few years, now is a strategic time to consider switching to electric. For businesses, electric cars are not just a sustainable choice—they’re also a smart financial one.