In recent years, we’ve witnessed a significant shift among company car drivers, especially directors of owner-managed businesses, towards Electric Vehicles (EVs) to capitalize on the available tax incentives. However, as they adapt to the realities of EV ownership, many are reconsidering their options, with hybrid vehicles emerging as a practical interim solution until the infrastructure fully supports an electric-only lifestyle. While EVs are appealing for their performance, tax savings, and environmental benefits, the phenomenon of ‘range anxiety’ is prompting a reevaluation among eco-conscious motorists.
The tax implications for company car users, including employees and company directors/owners, are significant. The tax on the provision of a vehicle is determined by the car’s list price and a percentage based on its CO2 emissions. High-emission vehicles can attract tax rates exceeding 30%, but new EVs initially benefited from a 0% rate, gradually increasing to the current 2%. Despite this increase, EVs remain financially advantageous.
From a corporate perspective, the purchase of new EVs offers substantial tax benefits, as these costs can be fully offset against Corporation Tax. Leasing EVs is also tax-efficient, with lease payments being deductible. Although buying was initially more popular, leasing has gained favor as it allows for the distribution of tax relief across the ownership period.
Despite the benefits, the practical challenges of EVs, particularly for regular long-distance travelers, have led to a renewed interest in hybrid vehicles. Hybrids were once seen as expensive compromises without the incentives of EVs, but this perception is changing. Notably, hybrids with substantial electric-only ranges are now subject to more favorable Benefit in Kind (BiK) rates, making them increasingly attractive.
For example, the XC90 Plug-in Hybrid Electric Vehicle (PHEV) exemplifies the advantages of hybrids. With CO2 emissions of only 28-34g/km, compared to over 200g/km for its mild-hybrid counterparts, the XC90 PHEV benefits from a lower 8% BiK tax rate. In contrast, the rest of the range falls into the 37% tax band. This means that for 40% tax payers, the annual BiK tax cost for the T8 model of the XC90 PHEV is under £2,300, significantly lower than the £9,000 or more for the mild-hybrid variants.
This shift towards hybrids, particularly PHEVs, is driven by their balance of practicality, cost-effectiveness, and environmental consideration. Hybrids, with their 18% per year writing down allowance against Corporation Tax, are gaining momentum as a viable alternative. As national charging infrastructures improve, EVs will likely regain prominence, but for now, hybrids, especially PHEVs like the XC90, offer a compelling, pragmatic choice.