Fuel benefit rise

Do you drive a company car or have employees who do? If so then you need to be aware of some significant changes to the benefit in kind rules.

Background

Where a director, or an employee, is taxable on a company car, then if fuel is provided as well as the car, there is an additional benefit.

The car fuel benefit is linked to the level of the car's CO2 emissions. The CO2 emission percentages that apply in determining the company car benefit are used in the car fuel calculation but, instead of applying the percentage to the list price of the car, the percentage is applied to a figure known as the multiplier.

Since 2003/04, the multiplier has been set at £14,400. However, in the Pre-Budget Report it was announced that this multiplier will increase to £16,900 from 6 April 2008, a 17% increase!

Example

John is provided with a company car and fuel for 2007/08. The car has CO2 emissions of 209g/km and a petrol engine.

For this car the appropriate percentage is 28%. The cash equivalent of the fuel benefit is £4,032 (£14,400 x 28%).

Under the new rules for 2008/09, the CO2 emissions percentage rises to 29%, an increase announced some time ago. When this higher percentage is applied to the new figure of £16,900, the car fuel benefit increases to £4,901 (£16,900 x 29%), an overall rise of 21.6% for the employee! And the employer’s Class 1A National Insurance, based on the taxable benefit, will also increase.

In order to make a car fuel benefit financially worthwhile, private mileage will need to be substantial. Whilst each computation will vary, due to differing levels of the benefit, fuel costs and fuel consumption of the car in question, as a rule of thumb an employee would need to be travelling at least 10,000 - 12,000 private miles per year to make the benefit cost efficient.

An alternative?

With such large increases, thought needs to be given by employers and employees as to whether the employee would be better off if they provided their own fuel and claimed a mileage allowance from their employer for business travel.

HMRC publish rates which can be used to reimburse employees tax free for business miles in a company car. These rates increased for journeys undertaken from 1 January 2008.

With such large increases in the car fuel benefit on the way, employers and employees should consider their positions and alternatives before April 2008. Please contact us if you would like to discuss this issue further.