Why Electric Company Cars Still Make Sense — Even as the Tax Rate Creeps Up

If you've had a company car through your limited company for a few years, you'll remember when electric was taxed at 2%. It's crept up since — 3% last year, 4% this year — and every time it moves, someone asks the same question: is it still worth it?

Short answer: yes…long answer below.

What's actually changed

The Benefit-in-Kind (BIK) rate — the percentage HMRC applies to a car's list price to work out how much of it counts as taxable income — has been rising by a point a year since 2025/26. This tax year it's 4%. It's confirmed to keep rising: 5% next year, then 7%, then 9% by 2029/30, where the government has said it'll level off.

What it actually costs

Take a fairly typical scenario: a £40,000 electric car, provided to a director on a higher-rate salary.

• Taxable benefit: £40,000 × 4% = £1,600

• The director's personal tax on that: £1,600 × 40% = £640 a year, or about £53 a month

• The company's Class 1A National Insurance on the same benefit: £1,600 × 15% = £240 a year

Compare that to a similarly priced petrol car in, say, the 30% band: the taxable benefit alone is £12,000 — nearly eight times higher — before you even apply the tax rate on top. The gap in real pounds is usually £3,000–£4,000 a year for a higher-rate taxpayer, and that's before you factor in fuel versus electricity running costs.

(Want to run your own numbers? Try the electric company car tax calculator further down this page — plug in a P11D value and see the employee and employer cost side by side.)

As a director, you're usually looking at this from both sides at once — what it costs you personally, and what it costs the company. Worth separating those out, because the answer isn't the same on both sides of the equation.

Buying outright vs leasing

The company's side: if you buy a new, unused electric car outright (or via hire purchase where ownership transfers to the company), it qualifies for a 100% First Year Allowance — the whole purchase cost comes off taxable profits in the year of purchase, rather than being spread out. For a company paying 25% corporation tax, that's up to £12,500 of relief on a £50,000 car, in year one. This is currently confirmed for purchases before 31 March 2027, though these deadlines have a habit of getting extended right before they bite — worth checking again nearer the time rather than assuming it's gone. https://gov.uk/capital-allowances/first-year-allowances

Lease instead, and the maths works differently but still favours electric: the finance element of a lease is normally deductible against profits, and for cars emitting 50g/km or less (which covers every fully electric car) that deduction is the full rental cost. Petrol and diesel cars above that threshold only get 85% — a 15% lease rental restriction that simply doesn't apply to EVs.

(How that deduction actually lands in the P&L — and when — depends on whether the lease is structured as something closer to ownership, a right-of-use arrangement, or a straightforward contract hire agreement. That's a proper topic on its own and we'll cover it in a follow-up article, rather than trying to squeeze lease accounting into a piece about company car tax.)

Your side as the driver: this choice doesn't change your BIK charge at all — the P11D value and the appropriate percentage work the same whether the company owns the car or leases it. What it does change is whose balance sheet carries the risk and who benefits from the tax relief on the way in.

Top Tip: One thing that catches people out either way: the P11D value that matters for your personal tax is the list price, not what the company actually negotiated. If you get a good discount from the dealer but the manufacturer's list price is higher, HMRC still uses the list price for your BIK calculation — worth checking the P11D figure before you commit, not after.

VAT — a separate question from corporation tax relief

It's easy to assume the generous corporation tax treatment carries through to VAT. It doesn't — VAT runs on its own rules.

Buying: VAT on the purchase price is blocked if there's any private use at all, even occasional home-to-work driving — this is the same rule as for any car, electric or not, and it's a high bar to clear (genuine pool cars only, in practice).

Leasing: the company can usually reclaim 50% of the VAT on the lease rental, regardless of how much private use actually happens — it's a flat block, not a reflection of your actual mileage split. Worth being clear this is a different rule from the 100% corporation tax deduction above; the two don't move together, and it's a common mix-up.

Charging: this is genuinely the messiest part of the VAT picture — the answer depends on whether it's a director/owner charging versus an employee, and whether the charging happens at the workplace, in public, or at home (home electricity is charged at 5% VAT, not 20%, which changes the numbers again). It deserves proper treatment on its own rather than a rushed paragraph here — we'll pick it up alongside the leases article.

Charging costs

Your side: if you charge the car at home using your own electricity, the company can reimburse you for the business-mileage portion without it counting as a taxable benefit to you — this changed a couple of years ago after HMRC accepted its earlier guidance was wrong. HMRC publishes a rate you can use without needing to justify it separately — currently 7p a mile for home charging and 15p a mile for public charging (updated quarterly, so worth checking these are still current if you're reading this later in the year). If the company doesn't reimburse you, you can claim a deduction against your income for the business-mileage electricity cost instead — just based on your actual costs, not the published rate.. https://www.gov.uk/guidance/advisory-fuel-rates

The company's side: charging at the workplace creates no taxable benefit at all, for any employee, as long as the facility is genuinely available to all staff and not just directors. And if the company pays directly for a home charging point to be installed at your house for the company car, that's not a taxable benefit either — it's specifically carved out.

What happens when you sell the car

This is the one that surprises people, because it works in the opposite direction to everything above.

The company's side: because a 100% First Year Allowance reduces the car's tax value to nil straight away, there's nothing left to write down further. So when the company eventually sells the car, the sale proceeds (up to the original cost) get added straight back into taxable profits as a "balancing charge" — corporation tax becomes due on the amount you sell it for. It's not a penalty; it's the tax system recovering relief that was only ever meant to be timing, not a permanent saving. But it does mean the number on the disposal invoice has a corporation tax bill attached that's easy to forget about three or four years after the original purchase felt like a big win.

Your side: none of this touches your personal position — the balancing charge sits entirely within the company's corporation tax computation, not your BIK history.

The practical takeaway

Pulled together, the electric company car case still stacks up well on both sides of the desk: low BIK for you as the driver, strong day-one relief for the company as the buyer or lessee, and genuinely tax-free ways to cover charging costs either way. The bit worth a proper conversation is the sequencing — buy versus lease, when to time the purchase against the First Year Allowance deadline, and building the eventual balancing charge into your planning rather than discovering it the year you sell.

If any of that sounds like where you are, it's worth talking it through properly before you sign anything.

Figures and content correct at the time of writing. Tax rates, thresholds and reliefs change, so always check the latest position against current HMRC publications and online guidance before acting.