How to Stay Safe from HMRC
8 May 15 | By: Jas Jhooty
For employees with company cars, getting the company to meet all of the fuel costs can be a convenient option. But now that fuel prices have taken a tumble, is free fuel really a worthwhile benefit?
2015/16 Fuel Benefit Charge
Where an employer provides free fuel for private motoring in a company car, the cash equivalent of the benefit is found by multiplying the appropriate percentage (based on the car’s CO2 emissions) used in calculating the car benefit by the fuel scale multiplier for the relevant tax year. The following table shows the maximum charge for 2014/15 and 2015/16. In both years this applies to cars with CO2 emissions of 210g/km and above.
|Tax year||Multiplier||Maximum charge||Tax thereon (@40%)|
|2014/15||£21,700||£7,595 (35% of £21,700)||£3,038|
|2015/16||£22,100||£8,177 (37% of £22,100)||£3,271|
The tax cost rises in 2015/16 not only as a result of the increase in the multiplier, but also due to the rise of two percentage points in the appropriate percentage from 35% to 37%.
Crunching the numbers
Let’s assume that all fuel is paid by the company, the employee is a 40% taxpayer who drives a petrol car that achieves 40mpg and fuel costs £1.10 per litre.
Low private mileage – 8,000 miles. At 40mpg he will use 200 gallons of petrol. This is equivalent to 909 litres. At £1.10 per litre, fuel for his private motoring will cost £1,000 a year (909 x £1.10). At this level of private mileage the fuel benefit charge is only worthwhile where the appropriate percentage is less than 12%. A notional appropriate percentage of 12% would generate a tax charge of £1,060 (40% (£22,100 @ 12%)). For 2015/16, it is only cars with CO2 emissions of 75g/km and below that have an appropriate percentage of less than 12%. Consequently, free fuel will virtually never be a worthwhile benefit in 2015/16 for a driver with low private mileage as the tax paid will generally be more than the cost of the fuel itself.
Average private mileage – 12,000 miles. In this case, the driver will use 300 gallons of petrol which will cost £1,500 a year. The break-even point comes where the appropriate percentage is 17% (which equates to CO2 emissions of 110g/km for 2015/16). The fuel benefit is £3,757 and the associated tax charge at 40% is £1,503. Thus, where private mileage is at a level of 12,000 miles a year, the fuel benefit is only worthwhile for 2015/16 if the CO2 emissions are below 110g/km.
High private mileage – 18,000 miles. At 40 mpg, the driver will use 450 gallons of petrol which will cost £2,250 in fuel. The break-even point is 25%, which is the appropriate percentage for cars with CO2 emission of 150g/km for 2015/16. The fuel benefit is £5,525 and the associated tax at 40% is £2,210. So with private mileage of 18,000 a year, the fuel scale benefit is only worthwhile if CO2 emissions are 150g/km or less.
How emTax can help
Despite the steep tax charges for car fuel benefit and falling fuel prices, it can still be tax efficient for the company to pay for fuel but only if the employee has very high private mileage. One of the services that emTax consultants offer is a company car cost modelling service.
This exercise involves undertaking a holistic whole life cost model of a snapshot of your current company car provisioning. Real life costs of acquisition/leasing, maintenance, insurance, fuel etc. are considered along with the tax, VAT & Class 1A NIC costs. From here, recommendations are made which in some cases have been found on average could save up to £1,000 per car per year.
These recommendations can include: –