Despite company cars gradually increasing in terms of income tax charges, they remain a popular choice of employee perk. However, is it worth your company also paying for fuel now that you have switched to a hybrid vehicle?
Fuel benefit
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 employees’ 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. This can lead to high tax and NI bills.
Example. Gavin, a higher rate taxpayer, is the sole director shareholder of Acom Ltd. It provides him with a company car – currently a five-year-old Audi with CO2 emissions of 178g/km. Acom also pays for Gavin’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 Gavin’s tax bill for having his car fuel bill paid for is £3,640 (£24,600 x 37% x 40%). Assuming fuel is £1.40 per litre and Gavin gets 34 miles to the gallon from his Audi, he would have to drive approximately 20,000 miles on private journeys before he would see any financial advantage from the arrangement.
Pro advice. In practice, the position is actually worse than this as Acom will have to pay Class 1A NI of £1,256 (£24,600 x 37% x 13.8%) for providing the benefit. A cost to Acom is a cost to Gavin because he owns the company. This means he would have to drive considerably more miles before the car fuel benefit was a worthwhile perk overall. This will be exacerbated when the NI rates increase in 2022.
Solution. One potential solution for your clients is that they can avoid the tax and NI bills on the car fuel by reimbursing the employer for the cost of the fuel. This is known as “making good” the benefit, and can be done up to and including 6 July following the end of the tax year.
Pro advice. This gives you time to work out if you have driven enough private miles to make the benefit worthwhile. If not, you can simply follow the reimbursement option.
What about green vehicles?
You have recently changed your 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 you’ve decided that the company will not pay for fuel for private motoring, or if it does you’ll make good the cost and so avoid the tax and NI charges. However, it might be worth reconsidering this. The percentage factor for car and car fuel benefits for hybrid cars is much lower than for petrol and diesel vehicles.
Example. In contrast with the previous example, the charges for 2021/22 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 you will still need to undertake the exercise at the year end to determine whether the reimbursement option would be better.
Pro advice. Remember, there is no fuel benefit if the company pays the employee’s electric bill for charging the car. Instead, the taxable amount is the actual cost to the company.
The percentage rates that are used to determine the tax and NI charge for hybrid cars do make fuel provision look more attractive. However, you should undertake an exercise at the end of the year to see if enough private miles have been driven to make it worthwhile. If not, you can avoid charges by reimbursing the company.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.