Highly taxed fuel
Tax increases from April 6 2008 are going to hit company car drivers really hard. You might not be able to change your car but is there anything else you can consider as a way to mitigate this tax hike?
Tax increases for company cars
Recap. Drivers of company cars are taxed on the basis of a percentage of the vehicle’s list price, which is obtained from a table of CO2 emissions. If the company also pays for fuel used on private journeys, the taxable fuel benefit is based on the same percentage of the fixed amount of £14,400.
Example. Your Mercedes C280 Sport has a list price of £31,077 and CO2 emissions of 219 g/km. In 2007/8 you are taxed on £9,323 (30% x £31,077) for the car, and £4,320 (30% x £14,400) for the fuel provided. As a higher rate taxpayer you pay tax of £5,457 ((£9,323 + £4,320) x 40%) for the pleasure of driving your Mercedes.
What’s changing? The CO2 emissions table has remained constant for the last three years, but from April 6 2008 all the percentages are to be increased by 1%. The fuel benefit constant also leaps to £16,900, which will increase the taxable fuel benefit by about 21%.
Example. For driving the same Mercedes C280 Sport in 2008/9 you will be taxed on £9,633 (31% x £31,077) for the car and £5,239 (31% x £16,900) for the free fuel provided. This amounts to a total tax charge of £5,948 ((£9,633 + £5,239) x 40%), which is an increase of £491 on your 2007/8 tax bill.
Break-even point
Calculate the tipping point. If the tax you pay on free fuel is less than the cost of the fuel used for your private journeys, you should stick with the free fuel, but you need to recalculate this break-even point for the new tax cost from April 6 2008. (See The next step.)
Example. The Mercedes C280 Sport does 30.7 miles per gallon according to its technical specification. Your tax charge in 2007/8 for free fuel is £1,728 (40% x £4,320). If the cost of petrol is, say, £1.10 per litre (£4.95 per gallon) (even in the supermarket garages), this would buy 349 gallons of fuel to drive 10,714 miles. If you drive more than 10,714 private miles in 2007/8, you’re quids in.
In 2008/9 your tax charge for free fuel will be £2,095 (£5,239 x 40%), which amounts to 423 gallons of fuel or 12,986 miles. So if you expect to drive less than 12,986 miles on non-business related journeys in 2008/9, cut out the free fuel.
Reducing the tax bill
Tip 1. If your private mileage is expected to be less than the break-even point for your car, buy all the fuel yourself and get the company to pay you a fuel-only mileage rate for all business-related journeys. The Taxman has set advisory fuel rates for different fuel types and engine sizes, which can be paid tax-free without quibble. The Mercedes C280 has a 2,996cc engine, so the company can pay you 19p per mile tax-free for business journeys.
Tip 2. If your company car is coming up for renewal, switch to a model with lower CO2 emissions. From April 6 2008, drivers of cars with CO2 emissions of 120g/km or lower are taxed on only 10% of the vehicle’s list price, and the taxable fuel benefit is just £1,690 (10% x £16,900). (See The next step for a previous article on this subject.)
The next step
For a spreadsheet to help you calculate your break-even private mileage figure (TX 08.08.05A) and for a previous article on low-emission company cars (TX 08.08.05B), visit http://tax.indicator.co.uk.
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