Company car? Don’t get hit for a fuel charge!

by Ray Chidell of www.taxinsider.co.uk

The provision of a company car was once just a great perk, and the tax costs were not really high enough to worry about.

Those days are long gone and the decision as to whether or not a company car makes good tax sense is now much more complex.

Amid the uncertainty, however, one clear point stands out: if you have a company car, avoid being hit for the additional fuel benefit charge.

This additional tax charge is imposed unless it can be clearly shown that the driver has paid for all fuel used for private journeys in the year. Commuting to work is a private journey for tax purposes.

There are now almost no circumstances in which it makes good tax sense for the employer to pay for fuel for private journeys: the additional taxable benefit has risen year by year and is now at a penal level.

The taxable fuel benefit is calculated by multiplying a fixed amount by the same “appropriate percentage” that is used to work out the company car benefit. The fixed figure for the current tax year is £20,200.

The percentage varies according to the car’s emissions figure but, for example, a diesel car with CO2 emissions of 157g/km will have a figure of 25 per cent.

Example

Assume that such a car is driven by Deborah, a family company director.

If the company meets the fuel cost of even the occasional private journey, Deborah will have to pay tax on £5,050 for the privilege (on top of the taxable benefit for the car itself). 

If she is paying tax at (say) 40 per cent, the annual tax cost is therefore £2,020. Is that really a bad deal?

Almost certainly, but it needs a little unravelling. Assume that diesel costs £1.40 per litre and that the car achieves 42mpg. One gallon is 4.546 litres.

Suppose that Deborah covers a higher-than-average 2,000 private miles per month. At first glance, she is better off paying the tax (of £2,020) than the fuel cost (which works out at £3,637).

But the reality is different, because if Deborah pays for the fuel the company saves the £3,637, plus a further £697 in National Insurance.

These total savings of £4,334 can be paid out as additional salary (net of employer National Insurance contributions) of £3,808.

Once Deborah has suffered tax (40 per cent) and National Insurance contributions (probably two per cent), she can have additional net pay of £2,209.

Add this to her tax saving of £2,020 and she has £4,229 in her pocket to cover the fuel cost of just £3,637.

So Deborah can pay for her own private fuel and still be better off by nearly £600. At lower levels of private mileage, the position is even more clear cut.

Practical tip:

In reality, the fuel benefit cost is often incurred unintentionally, simply because the paperwork is not watertight. 

On a practical level, it is much safer for the employee to pay for all fuel initially. The employer can then reimburse genuine business mileage at officially approved rates.

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Published on: June 1, 2012

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