Company cars continue to be a popular benefit in kind. However, 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? Helen Johnstone does just that.
Car versus 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 the taxable benefit where the employer pays for 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 set by the government each year. For 2021/22 it’s £24,600 and this can lead to some huge tax and NI bills.
Robert, a higher rate taxpayer, is the sole director and shareholder of Bruce Ltd. It provides him with a company car – currently a five-year-old BMW with CO2 emissions of 178g/km. Bruce Ltd also pays for Robert’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 Robert’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 Robert 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.
The position is worse than this as Bruce Ltd will have to pay Class 1A NI of £1,256 (£24,600 x 37% x 13.8%) for providing the benefit. A cost to Bruce Ltd is a cost to Robert 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.
The good news for Robert is that he can avoid the tax and NI bills on the car fuel by reimbursing Bruce Ltd for the cost of the fuel. This is known as “making good” the benefit, and Robert can do it any time up to and including 6 July following the end of the tax year. This gives him time to work out if he has driven enough private miles to make the benefit worthwhile.
Time to change?
Robert 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 horrible tax and NI bill previously, he’s decided that Bruce Ltd 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.
The percentage factor for car and car fuel benefits for hybrid cars is much lower than for petrol and diesel vehicles.
To make a like-for-like comparison with our previous example we are using the figures for 2021/22 and assuming the hybrid car and fuel for 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% x 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 Robert’s petrol costs 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 is no fuel benefit if Bruce Ltd pay Robert’s electricity bill for charging his new car.
The tax and Class 1A NI bills for hybrid cars are significantly lower than for those powered only by fossil fuels. This can make car fuel benefit a tax-efficient perk, but it can depend on the ratio of private miles driven using fossil fuels to electric only.