May 21, 2024 NB Accounting Services Limited

I often receive inquiries about the tax implications of company cars and fuel benefits. Whether you’re a business owner providing these perks or an employee receiving them, understanding the financial impact is crucial. Here’s a detailed overview of how these benefits are calculated and what they mean for your tax position.

Car Benefit Calculation

The primary factor in determining your car benefit is the list price of the vehicle at the time it was first registered. This means any discounts negotiated by your employer do not affect the calculation. For illustration, let’s assume the list price of your new company car is £40,000.

The list price is then subjected to a percentage based on the car’s CO2 emissions, rounded down to the nearest multiple of 5. The percentage ranges from 20% for cars emitting 75g/km of CO2 to a maximum of 37% for those emitting 160g/km or more. For a car emitting 130g/km of CO2, the calculation would be as follows:

  1. Calculate the base percentage:
  1. CO2 emissions (130g/km) minus 75g/km = 55.
  2. Divide 55 by 5 = 11.
  3. Add the base percentage of 20% to get 31%.
  1. Determine the annual car benefit:
  1. £40,000 (list price) × 31% = £12,400.

Since the car is available for only five months in the 2024/25 tax year, we need to pro-rate this benefit:

  • Annual benefit: £12,400.
  • Pro-rated for five months: £12,400 × (5/12) = £5,167.

Additionally, if you contribute to the cost of using the car (e.g., £100 per month), this reduces the benefit:

  • Total contributions: £100 × 5 = £500.
  • Adjusted car benefit: £5,167 – £500 = £4,667.

Thus, the car benefit for the 2024/25 tax year is £4,667.

Fuel Benefit Calculation

If your employer covers the cost of fuel for private use, this creates a taxable benefit. The benefit is calculated using a fixed amount of £27,800, multiplied by the same percentage used for the car benefit (31% in this example).

  1. Calculate the annual fuel benefit:
  1. £27,800 × 31% = £8,618.

Since the fuel is provided for only five months, this too needs to be pro-rated:

  • Annual fuel benefit: £8,618.
  • Pro-rated for five months: £8,618 × (5/12) = £3,591.

Therefore, the fuel benefit for the 2024/25 tax year is £3,591.

Key Points to Remember

  1. No Partial Contributions: If you partially reimburse your employer for private fuel use, it does not reduce the fuel benefit. It’s either all or nothing.
  2. Business Fuel Exemption: No fuel benefit arises if your employer pays only for business fuel. However, commuting is not considered business travel.
  3. Diesel Surcharge: Diesel cars not meeting the Real Driving Emissions Step 2 (RDE2) standard attract a 4% supplement to the car benefit percentage, though it cannot exceed the 37% cap.

Practical Considerations

Given the tax implications, it’s worth reconsidering whether to opt for a company car or take cash instead, especially if your car has high CO2 emissions. Opting for a vehicle with lower emissions can significantly reduce your taxable benefit.

Employers also need to factor in Class 1A National Insurance contributions, which are 13.8% of the cash equivalent of the car and fuel benefits.

Understanding these nuances ensures that both employers and employees can make informed decisions regarding company cars and fuel benefits. If you have any further queries or need personalized calculations, feel free to reach out.

This breakdown should help demystify the tax implications of company cars and fuel benefits, allowing you to make more informed financial decisions.