Electric cars remain one of the most tax-efficient business purchases available. The 100% first-year allowance, ultra-low benefit in kind rates, and no fuel benefit charge create a combination that petrol and diesel vehicles can’t come close to matching.
But the incentives won’t stay this generous forever. BIK rates are rising year on year. The main writing-down allowance has been cut. And from April 2028, a new mileage-based road charge for electric vehicles will add to running costs.
If you’re a business owner, company director, or self-employed professional considering an electric car, here’s the full tax position for 2026/27 and beyond.
The 100% First-Year Allowance
The headline benefit of buying a new electric car for your business is the 100% first-year allowance (FYA). This lets you deduct the entire cost of the vehicle from your taxable profits in the year you buy it – rather than spreading the relief over several years through writing-down allowances.
To qualify, the car must be:
- Brand new (not second-hand)
- A zero-emission vehicle (fully electric – plug-in hybrids don’t qualify)
- Purchased, not leased
The allowance has been extended several times. Following the November 2025 Budget, it now runs until 31 March 2027 for corporation tax purposes and 5 April 2027 for income tax purposes. There’s no guarantee it will be extended again – if you’re planning to buy, the deadline is worth keeping in mind.
What This Means in Practice
If a limited company buys a new electric car for £45,000 and claims the 100% FYA, the full £45,000 is deducted from taxable profits in that accounting period. At the 25% corporation tax rate, that’s a tax saving of £11,250 in year one.
For a self-employed sole trader on the higher rate of income tax (40%), the same £45,000 purchase would save £18,000 in the first year – though the claim must be reduced to reflect any personal use of the vehicle.
Electric Vehicle Charge Points
The 100% first-year allowance also applies to the installation of electric vehicle charge points. The same deadline applies – 31 March 2027 (corporation tax) or 5 April 2027 (income tax). If you’re installing a charger at your business premises or home office, the full cost can be written off in the year of purchase.
What About Second-Hand Electric Cars?
The 100% FYA only applies to new vehicles. If you buy a used electric car, the cost goes into the main pool for capital allowances and is relieved through writing-down allowances instead.
From April 2026, the main rate writing-down allowance was reduced from 18% to 14% per year on a reducing balance basis. This applies to all main pool assets, not just cars – but it means used electric cars now take longer to write off than they would have before the change.
For example, a business buys a used electric car for £25,000:
- Year 1: 14% of £25,000 = £3,500 allowance
- Year 2: 14% of £21,500 = £3,010 allowance
- Year 3: 14% of £18,490 = £2,589 allowance
The relief continues each year until the pool balance is fully written off. It’s still worthwhile, but the upfront tax saving is considerably smaller than the 100% FYA available on a new vehicle.
Benefit in Kind: The Company Car Tax Advantage
If you provide an electric car as a company car – either for yourself as a director or for an employee – the BIK rate is where electric vehicles really stand apart.
BIK is a tax on the personal use of a company car. It’s calculated as a percentage of the car’s P11D value (list price including options and delivery, excluding road tax and first registration fee), multiplied by the employee’s income tax rate.
The confirmed BIK rates for zero-emission electric vehicles are:
- 2025/26: 3%
- 2026/27: 4%
- 2027/28: 5%
- 2028/29: 7%
- 2029/30: 9%
Compare that to petrol and diesel cars, where BIK rates can reach 37% depending on emissions.
A Worked Example
A company provides a director with an electric car worth £40,000 (P11D value). In 2026/27:
- BIK value: £40,000 × 4% = £1,600
- Tax for a 40% taxpayer: £1,600 × 40% = £640 per year (roughly £53 per month)
A petrol car of similar value with a 30% BIK rate would produce a tax bill of £4,800 per year – more than seven times as much.
The employer also pays Class 1A NIC on the BIK value. At 15%, that’s £240 per year on the electric car versus £1,800 on the petrol equivalent.
No Fuel Benefit Charge
There’s another advantage that’s easy to overlook. For petrol and diesel company cars, if the employer pays for private fuel, there’s an additional fuel benefit charge – a flat multiplier that can add thousands to the taxable benefit.
Electric vehicles are exempt. Even if the company pays for all the charging, there’s no fuel benefit charge. This makes the overall tax cost of running an electric company car even lower.
Leasing vs Buying
If you lease an electric car rather than purchasing it outright, the tax treatment changes.
You can’t claim capital allowances on a leased vehicle – you don’t own it. Instead, the lease payments are treated as a deductible business expense, reducing your taxable profits over the term of the lease.
The key advantage for electric cars here is the lease rental restriction. For cars with CO₂ emissions above 50g/km, HMRC disallows 15% of the lease cost – meaning only 85% is deductible. For zero-emission electric cars, there’s no restriction at all. 100% of the lease payments are deductible against taxable profits, assuming full business use. If there’s personal use, the deduction is reduced proportionately.
Leasing also has a VAT angle for VAT-registered businesses. HMRC treats any company car available for private use as 50% business, so you can reclaim 50% of the VAT on lease payments. If a maintenance package is included in the lease, 100% of the VAT on that element is reclaimable.
Whether buying or leasing is better depends on your cash flow, how long you plan to keep the vehicle, and whether the 100% FYA tax saving in year one outweighs the cash flow benefit of spreading costs through a lease. For many businesses, the answer changes depending on their profit level that year.
Salary Sacrifice Schemes
Electric car salary sacrifice schemes have become popular with employers, and the tax numbers explain why.
Under a salary sacrifice arrangement, the employee gives up part of their gross salary in exchange for the use of a leased electric car. The employee saves income tax and National Insurance on the sacrificed salary. The employer saves employer NIC on the same amount, though they then pay Class 1A NIC on the BIK value.
With BIK rates at just 4% for 2026/27, the savings can be substantial – particularly for higher rate taxpayers. The exact figures depend on the car’s P11D value, the employee’s tax rate, and the monthly sacrifice amount, but savings of £1,000 to £3,000 per year compared to leasing personally with after-tax income are common.
As BIK rates rise towards 9% by 2029/30, the advantage narrows – but for leases starting in 2026/27, the rates locked in over a three-year term are still very favourable.
Personal Use Adjustment for Sole Traders
If you’re self-employed and use an electric car for both business and personal journeys, you must reduce your capital allowance claim to reflect the business proportion of use.
For example, a sole trader buys a new electric car for £40,000 and uses it 70% for business. The FYA claim would be:
£40,000 × 70% = £28,000
At a 40% income tax rate, that’s a tax saving of £11,200 in the first year. The personal use proportion cannot be claimed.
Keep a mileage log to evidence the split. HMRC expects this to be reasonable and may challenge claims where the business proportion looks high relative to the nature of the work.
What’s Coming: eVED from April 2028
One change worth planning for is the introduction of Electric Vehicle Excise Duty (eVED) from April 2028. This will be a mileage-based charge for electric and plug-in hybrid vehicles, payable alongside standard Vehicle Excise Duty.
Electric cars will pay half the equivalent fuel duty rate for petrol and diesel vehicles. Plug-in hybrids will pay a reduced rate equivalent to half the electric car rate. The government has published a consultation on how the system will work.
This won’t affect capital allowances or BIK, but it will add to the running costs of electric vehicles from 2028 onwards. For businesses making fleet decisions now, it’s a factor in the total cost of ownership calculation.
How Double Point Can Help
Electric vehicles offer genuine tax savings for businesses and self-employed individuals – but the rules interact with capital allowances, BIK, VAT, and your wider tax planning in ways that aren’t always obvious.
At Double Point, we help business owners work out whether buying or leasing makes more sense for their situation, calculate the capital allowance claim correctly (including the personal use adjustment for sole traders), and factor the vehicle into their overall profit extraction and corporation tax strategy.
If you’re thinking about going electric – or you’ve already made the purchase and want to make sure you’re claiming everything you’re entitled to – we can help.
Book a free consultation with us today.