Is it time to add fuel to your benefits package?
Company cars continue to be popular benefit in kind. Conversely, employer-paid-for fuel has a poor reputation for resulting in disproportionately high tax bills. Is this still justified or might it be time for another look?
Car versus car fuel
The calculation of tax and Class 1A NI on company cars provided as a benefit in kind is reasonably logical. It varies according to the original list price of the car and its CO2 emissions. The second factor is also used in the calculation of taxable benefit where the employer pays for your fuel for private journeys made in a company car. However, the other factor has no link to the value of the fuel but is a fixed amount ser by the government each year. For 2021/22 it’s £24,600. This can lead to some eye-watering tax and NI bills.
Example. Dave, a higher rate taxpayer, is the sole director and shareholder of Acom Ltd. It provides him with a company car – currently a five-year-old BMW with CO2 emissions of 178g/km. Acom also pays for Dave’s fuel for private journeys. The factors for working out the car fuel benefit are 37% (based on the car’s CO2 emissions) and the fixed amount of £24,600. This means Dave’s tax bill for having his car fuel bill paid for is £3,640 (£24,600 x 37% x 40%). Assuming fuel is £1.30 per litre and Dave gets 34 miles to the gallon from his BMW, he would have to drive 20,940 miles on private journeys before he would see any financial advantage from the arrangement.
Trap. The position is actually worse than this as Acom will have to pay Class 1A NI for £,256 (£24,600 x 37% x 13.8%) for providing the benefit. A cost to Acom is a cost to Dave because he owns the company. This means he would have to drive considerably more than 20,940 miles before the car fuel benefit was a worthwhile perk.
Tip. The good news for Dave is that he can avoid the tax and NI bills on the car fuel by reimbursing Acom for the cost of the fuel. This is known as “making good” the benefit, and Dave can do it any time up to and including 6 July following the end of the tax year. This gives him to work out if he’s driven enough private miles to make the benefit worthwhile.
Time to change?
Dave has decided to change his company car for a hybrid with CO2 emissions of 44g/km and an electric range of 40 miles. Having experienced the horrendous tax and NI bill he’s decided that Acom will not pay for fuel for private motoring, or if it does he’ll make good the cost and so avoid the tax and NI charges. However, it might be worth him reconsidering this.
Tip. The percentage factor for car and car fuel benefits for hybrid cars is much lower than for petrol and diesel vehicles.
Example. To make a like-for-like comparison with our previous example we’re using the figures for 2021/22 and assuming the hybrid car and fuel for your private mileage was provided for the whole tax year. The tax and Class 1A bill for car fuel benefit would be £688 (£24,600 x 7% 40%) and £237 (£24,600 x 7% x 13,8%) respectively. The tax and NI looks much more reasonable. However, the use of the car in electric mode will boost the MPG considerably and so Dave’s petrol cost will be lower. He should still therefore make the calculation after the end of the tax year to determine if making good the cost of fuel is a good option. Note that there’s no fuel benefit if Acom pays Dave’s electricity bill for charging his new car. Instead, the taxable amount is the cost to the company.
The tax and Class 1A NI bills for hybrid cars are significantly lower than for those powered only by fossil fuels. This can make care fuel benefit a tax-efficient perk, but it can depend on the ratio of private miles driven using fossil fuels to electric only.