The increase in NI contributions (NIC) will hit both employers and employees from the start of the 2003 tax year, and could force companies to rethink the value of cash alternatives offered to staff in lieu of a company car.
Chancellor of the Exchequer Gordon Brown's NIC fundraiser could also inflate prices among fleet service companies.
The biggest impact on fleets comes from a one percentage point increase to 12.8% from 11.8% in employer's NIC due on staff wages and benefits. In real terms this equates to an 8.5% increase in employer NICs.
Employers have to pay Class 1A NIC on the benefit charges faced by employees in receipt of both a company car and free fuel for private motoring.
According to the latest available Inland Revenue figures (for 1998/1999), 1.68 million company car drivers faced a total taxable benefit of £4,990 million.
The one point rise in the NI rate to 12.8% will inflate the total employer NIC bill on this figure by £49.5 million to £638.7 million (£588.8 million at 11.8% NI rate).
However, Lex Vehicle Leasing's own figures suggest the impact of the higher NI rate could be as high as £100 million. Jon Walden, managing director of Lex Vehicle Leasing, said the contract hire firm's own staff costs could jump by £200,000 because of the increased insurance contribution.
He said: 'This is a stealth tax on jobs. There are a lot of initiatives in the Budget that I applaud, but not this.'
Employees will also have to pay higher NICs from next year, rising from 10% to 11% on all earnings up to £30,940, and a new 1% charge for earnings above this threshold.
Stewart Whyte, managing director of Fleet Audits, said this could affect companies offering a cash for car scheme, because employees will have to pay the new NI rates on 'any cash allowances paid for any alternative to a company car.'
However, Nick Sutton, managing director of employee car ownership scheme provider Provecta Car Plan, claims the higher NI rates play into the hands of fleet schemes that rely on Inland Revenue Approved Mileage Allowance Payments (AMAPs) that are tax-free and NI-free.
These schemes see employees own their company cars, thereby avoiding benefit in kind tax and saving employers Class 1A NIC on the benefit charge.
In addition, employees fund their cars wherever possible through AMAPs for business mileage, making much of the 'cash allowance' National Insurance free. 'Within a few years it will be too expensive to run company cars, so an increasing number will turn to cash alternatives,' said Sutton.
National Insurance fact file
Class 1 (employers and employees). Contracted-in