Fleet News

Fleet News Healthchecks: Free fuel conundrum

'GIVE me £500 and I'll save you £1,000' sounds like a fairground huckster's con patter, but in the issue of providing company car drivers with free fuel for private miles this promise has sound financial sense behind it.

The Government has ratcheted up the benefit in kind tax on free fuel over the last four years – with an outline commitment to continue the skywards tax hike by a further 20% in the next Budget – to the point where the receipt of free fuel no longer makes decent financial sense to either employer or employee.

Caroline Rai, a senior consultant on employee issues with KPMG, presented a calculation illustrating this point at the Fleet News Healthcheck, sponsored by, AA Business Services and Interleasing.

The example is based on a 40% tax payer driving a 1.9-litre company car that returns 30mpg, over 12,000 private miles a year, with unleaded petrol costing 70 pence per litre or £3.20 per gallon.

From the driver's perspective, the value of the free fuel is £1,280, although he pays tax at 40% on the fuel scale charge used to assess the value of the benefit. For a 1.9-litre petrol car, the tax charge is £2,460 so the actual tax payable is £984 (£2,460 x 0.4), so the benefit to the driver is £296 (£1,280-£984).

From the employer's perspective, the fuel costs £1,089 (ex-VAT) as well as a pro-rata VAT charge of £183 based on official Customs & Excise figures.

The employer also has to pay Class 1A National Insurance Contributions on the benefit, which amounts to £293. This makes the total cost to the employer of providing free fuel to be £1,565.

In total, therefore, providing free fuel to this driver costs £2,549 (the £984 tax paid by the driver and the £1,565 paid by the employer) to deliver a benefit value of just £296 to the driver. This equates to a tax rate of almost 90%. Instead, delivering the £296 in cash to the driver would cost the employer just £552 (including NIC).

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