Sarah Bradford takes a look at the tax charge that arises where an employee has a company car and the employer pays for the fuel as well, and considers whether free fuel is really a worthwhile benefit.
Petrol is expensive and, on the face of it, it would seem a good result if your employer offers to pay for the petrol for all journeys in your company car, including private travel. However, in reality, `free fuel’ is not really free at all, and the high tax charge associated with the benefit may end up costing you more than if you pay for your private fuel personally.
Fuel benefit charge
A benefit-in-kind tax charge arises where an employer pays for fuel for private motoring in a company car. The amount that is charged to tax (the cash equivalent of the benefit) is found by multiplying the appropriate percentage used in calculating the car benefit charge by the fuel multiplier for the year. For 2015/16, the ‘fuel multiplier’ is set at £22,100.
The cash equivalent of the fuel benefit will vary from £1,105 (5% of £22,100) to £8,177 (37% of £22,100) depending on the car’s CO2 emissions, and therefore the tax for a 40% taxpayer from £442 to £3270.80. The higher the CO2 emissions, the more tax is payable on the benefit of free fuel.
Example 1 - Calculating the fuel benefit
Victoria has a company car with CO2 emission of 152g/km. The car is the petrol model. For 2015/16, the appropriate percentage for such as car is 25%.
If Victoria’s employer is to pay for her private fuel throughout 2015/16, Victoria will be taxed on the resulting benefit. The cash equivalent of the benefit is £5,525 (25% of £22,100). Assuming Victoria is a higher rate taxpayer paying tax at 40%, for 2015/16, her `free’ fuel will cost her £2,210 (40% of £5,525) in tax.
Is this worthwhile?
The fuel benefit is only worthwhile if the amount that you would spend on petrol in the year is more than the tax that is paid on the benefit if your employer pays for the fuel. This will depend on the price of fuel, the fuel consumption of your company car, the level of the car’s CO2 emissions (which determines the percentage of the multiplier charged to tax) and your marginal rate of tax.
Example 2 – is the fuel benefit worthwhile?
Daniel has a company car with CO2 emissions of 109g/km. The car achieves 50 miles per gallon. Daniel drives 8,000 private miles in a tax year, and pays tax at 40%. The current fuel price is 113p per litre.
For 2015/16, the appropriate percentage for a car with CO2 emissions of 109g/km is 16%. Therefore, if Daniel’s employer meets the cost of free fuel, Daniel will be taxed on a benefit of £3,536. As Daniel pays tax at 40% the benefit of `free’ fuel will cost him £1,414.40 (i.e. £3,536 @ 40%) in tax.
However, if Daniel pays for his own petrol, he will use 160 gallons in a year (8,000 miles achieving 50 miles per gallon). This is equivalent to 727 litres, which at a cost of 113p per litre will cost him £821 a year. This is less than the tax payable on the fuel benefit.
At this level, the free fuel is not a benefit at all, as Daniel would pay more in tax than it would cost him to pay for the fuel himself.
For the fuel benefit to be worthwhile, Daniel would need to drive more than 13,750 private miles each year. At private mileage of 13,750 miles a year in 2015/16, the cost of petrol (1,251 litres (275 gallons) at 113 pence per litre) would equate to the tax payable on the fuel benefit.
Consequently, unless Daniel has relatively high private mileage, for him the fuel benefit is not worthwhile.
Tip:
You may be much better off taking a cash alternative to free fuel if this is something that your employer offers. If this is not on the table, depending on car and mileage levels, it may be better to pay for petrol yourself than take the tax hit on the benefit.
Practical Tip:
In a climate of falling fuel prices and year-on-year increases in the car fuel multiplier, it is not a given that free fuel is a worthwhile benefit. Do not automatically accept the benefit – do the sums first!
