UK employers could give key staff their company cars in lieu of an annual bonus to help drivers escape sharp rises in their benefit-in-kind tax.

The innovative 'cars for cash' tax plan provides an instant solution for employees who are currently driving company cars with high carbon dioxide emissions.

In extreme cases, some of these drivers will see the basis of their benefit-in-kind tax rise from 15% to 35% of the list price of their cars under the new emissions-based company car tax system. A 40% taxpayer who exceeds 18,000 business miles a year in a £31,000 Jaguar S-type will see his or her monthly tax bill rise from £155 this financial year to £360 next April. These exceptional tax hikes pose serious human resource problems, particularly if a driver is scheduled to keep the same car for another year or two. Faced with this situation, companies can either allow drivers to hand in their car keys and select a new company car - a solution that incurs heavy depreciation costs - or risk losing highly-valued employees as tax refugees to rival firms.

A far more tax and cost-effective solution could be to make a gift of those cars to their drivers in place of their annual bonus, according to Denis Kaye, a partner at accountancy firm Wilson Braithwaite Scholey, who said some companies had already started to implement the plan, with drivers typically deciding to run their ex-company cars as private vehicles (and reclaim business mileage under Inland Revenue Authorised Mileage Rates). There are also significant financial advantages for companies.

'Employees must pay benefit-in-kind tax on the gift at their marginal tax rates, but this is in relation to the current trade market value of the car - not its original list price,' said Kaye.

This means a driver can receive the car for its trade, rather than retail, used price, with the value determined by guides such as CAP Black Book and Glass's Guide, or through a written valuation by a dealer. The company, meanwhile, can write off the full price it paid for the car (minus annual depreciation allowances) against its corporation tax.

The 'gift' does incur employer National Insurance contributions on its market value, but these NIC payments are tax deductible.