27 October 2021
Our medical practices specialist, James Gransby assesses the potential tax relief options for GPs considering buying an electric car.
We are frequently asked by GPs who are considering changing their car if it’s more tax efficient to go electric. The short answer is - it depends.
What are the current rules?
If you have no change in marginal tax rate or business use percentage over the period of ownership, then the overall tax saved would be identical. However, the phasing of when you benefit from the tax relief differs – electric cars save you tax in year one, but higher CO2 emission cars wouldn't get the bulk of the tax relief until sale.
Here’s an example:
Let’s say a GP partner, who is a 40 per cent taxpayer, bought a new car for £100,000 with 50 per cent business use. Four years later they sell it for £50,000, having used it for business 50 per cent of the time.
If the car is electric, the calculations are:
Year 1: tax relief = £100,000 x 50% (business use) x 40% (tax rate) = £20,000 tax saved.
Year 2: no tax relief (all given in year one).
Year 3: no tax relief.
Year 4: tax payable on £50,000 sale proceeds x 50% x 40% = £10,000 tax payable.
Overall tax saved: £20,000 – £10,000 = £10,000 tax saved.
If the car is over 50 g/km CO2:
Year 1: £100,000 x 6% (capital allowances) x 50% (business use) x 40% (tax rate) = £1,200 tax saved.
Year 2: £94,000 x 6% x 50% x 40% = £1,128 tax saved.
Year 3: £88,360 x 6% x 50% x 40% = £1,060 tax saved.
Year 4: £83,058 tax value – £50,000 sale price = £33,058 x 50% x 40% = £6,612 tax saved.
Total tax saved: £1,200 + £1,128 + £1,060 + £6,612 = £10,000 tax saved.
Note that, if the CO2 is 1g/km to 50g/km, then the tax writing down allowance would be 18 per cent per year but the final result would be the same – it would arise as £3,600 + £2,952 + £2,421 + £1,027 = £10,000.
Ultimately, then, the tax situation is identical but with an electric car you get all of the relief in the year of purchase. You then have to pay some of that tax back when you sell the car, but for the high CO2 car the final part of the tax saving comes when you sell it (which could come as a tax charge if it has depreciated more that the tax written down value).
Should you be in a high marginal tax band one year, the 100 per cent relief can be very useful if it can get you below that band. For example, someone with total taxable income between £100,000 and £125,140 pays an effective 60 per cent rate of tax. A well-timed electric car purchase means this taxpayer could achieve 60 per cent as their marginal tax saving – but on the flip side, if they are under the £100,000 threshold but sell the electric car for a balancing charge in future the sale may push them into the higher band! (Unless another car was purchased in the same tax year...)
An electric car does not result in a beneficial tax treatment for many people, but the relief does come sooner.
This is all relevant for the 2021/22 tax year, and as things stand would hold true for the next few tax years too.
The above example is for illustrative purposes only and we recommend a detailed review because real life is often much more complex. But this example does illustrate that electric cars do not provide greater tax relief (and could cost more in tax if marginal tax bands aren't considered carefully).
It’s also very important to note that this example covers the purchase of an electric car for a self-employed partner or sole trader. Company car tax relief differs greatly to the example given here, and can often favour the electric car over a car that emits more CO2.
For further guidance on your tax relief options around the purchase of electric cars, please contact James Gransby.