With the rise of electric vehicles (EVs) and changing tax regulations, businesses need to weigh the tax advantages and disadvantages of different company car options. Whether opting for traditional fuel-powered cars or making the switch to EVs, understanding the tax implications can help companies make cost-effective decisions.
Advisory fuel rates and mileage allowances
For businesses providing company cars, HMRC’s advisory fuel rates (AFRs) determine tax-free reimbursements for employees using company cars for private mileage. These rates vary depending on fuel type and engine size, impacting how much employers can reimburse employees without triggering tax liabilities.
Current Advisory Fuel Rates (from 1 March 2025):
- Petrol: 12p to 23p per mile (depending on engine size)
- Diesel: 12p to 17p per mile
- LPG: 11p to 21p per mile
- Electric Vehicles (EVs): 7p per mile
For employees using their own cars for business travel, the Advisory Mileage Allowance Payment (AMAP) allows tax-free reimbursements at 45p per mile for the first 10,000 miles, reducing to 25p thereafter. Employers can reclaim VAT on the fuel portion if supported by a VAT receipt.
EV tax advantages
EVs have been an attractive choice due to lower tax burdens, but key changes are coming.
Vehicle Excise Duty (VED) changes from 1 April 2025:
- Existing EVs (registered before 31 March 2025) will be taxed at £195 per year.
- New EVs (from 1 April 2025) with a list price under £40,000 will pay £10 in the first year, then £195 annually.
- New EVs over £40,000 will also incur a luxury car supplement of £425 per year from the second to sixth year.
Currently, EVs remain exempt from fuel duty, making electricity a cost-effective option compared to petrol or diesel. However, with rising energy costs and the introduction of VED from 2025, the long-term tax savings may diminish.
Fuel vs. Electric Company Cars
Fuel-powered cars
Pros
- Higher AFR reimbursement rates for employees using company cars for business trips
- No high initial purchase costs compared to EVs
Cons:
- Higher fuel costs due to rising petrol/diesel prices
- Greater CO2 emissions, leading to higher Benefit-in-Kind (BIK) tax rates
Electric Vehicles (EVs)
Pros
- Significantly lower BIK rates than petrol/diesel cars
- Salary sacrifice options can be tax efficient
- Cheaper per-mile running costs (7p per mile reimbursement vs. higher petrol/diesel costs)
- Environmental benefits and potential grants for workplace charging
Cons
- High upfront cost, especially for premium EVs
- Upcoming VED charges, reducing past tax advantages
Should businesses transition to EVs?
The shift to EVs is still tax-efficient, but businesses should plan carefully.
“If you have or are considering EVs, timing is key.” says Managing Director, Charlotte Hinchcliffe. “Companies should consider taxing their EVs before 31 March 2025 to delay the new VED charges. Businesses investing in workplace infrastructure should also explore tax reliefs available for installing EV chargers at their premises.”
How can we help?
While EVs still offer significant tax benefits, upcoming road tax changes from April 2025 reduce the incentive compared to previous years. Businesses must assess their fleet strategy, factoring in fuel rates tax reliefs, and operational costs to ensure the most cost-effective decision.
For advice relating to company cars, contact our Tax Team at tax@haroldsharp.co.uk or 0161 905 1616. Alternatively, you can complete our Contact Form to request a callback.