Pump prices are down; in fact, fuel is cheaper than it was in 2011. Despite this, the tax charge where your business pays for fuel that you use for private journeys in a company car has steadily increased. Can it ever be tax efficient?
A good job-related perk or, as HMRC calls it, a benefit in kind (BiK) can and ought to be tax efficient. If it costs more in tax and NI than it’s worth, it should definitely be avoided. Fortunately, there aren’t many BiKs that fall into this category; however, company-paid-for fuel is one that does, for some people.
If you have a company car, you’re taxed on a percentage of its list price. This rate varies according to the car’s CO2 emissions. If your company also pays for fuel for private journeys this is taxed as an additional BiK. The percentage used to calculate the taxable amount is the same as that used for the car. But rather than being applied to the value of fuel your company pays for, a fixed amount is used. For 2014/15 it’s £21,700.
Example. A company car emits CO2 at 185 g/km, therefore the percentage used to work out the car and fuel BiKs is 30%. For fuel the taxable amount is £6,510 (£21,700 x 30%) and so if you’re a 40% taxpayer you’ll pay £2,604. This is the cost to you of your company paying for fuel for personal journeys. At current pump prices that would buy around 440 gallons. If your MPG is say, 35, you would have to drive 15,400 miles on personal journeys before the perk became worthwhile.
As well as meeting the cost of fuel, your company has to pay Class 1A NI at 13.8% on the BiK of £6,510; that’s £898. Assuming you drive just enough miles to reach the point the BiK becomes worthwhile for you, your company would have to pay for £2,604 worth of fuel. Therefore, adding the NI to the BiK amount costs your company £3,502. Would it be more tax efficient for your company to pay you extra salary to cover the cost of fuel?
Perk v salary
As a 40% taxpayer you would need extra gross pay of £4,490 to end up with £2,604 in your pocket. The cost to your company of paying this would be £5,110 (gross salary plus employers’ NI). Based on these figures the BiK route is a clear winner. However our example is very specific, in real life the many variables, e.g. the number of private miles you drive, the price of fuel, MPG, etc. makes deciding if it’s more tax efficient for you or your company to pay for fuel fiendishly tricky.
Tip 1. Use our company car fuel comparison tool. It can, at any point during the tax year, compare the costs to you and your company of providing fuel as a perk versus taking extra salary or even dividends.
Tip 2. To avoid being taxed on car fuel as a BiK, your terms of employment must require you to reimburse your company the cost of fuel for private mileage and the reimbursement must actually be made. Include a clause in your contract to this effect. It’s then easy for you to switch between being taxed on the BiK or not depending on what’s more tax efficient. If being taxed on the BiK is the most tax-efficient option, just don’t reimburse your company to ensure it applies.
In Summary: Car fuel benefit can be more tax efficient than paying for fuel yourself. Use our comparison tool to check. Include a clause in your contract that requires you to reimburse your company for private mileage. Avoid being taxed on a benefit by reimbursing your company, but if the benefit is the cheaper option then don’t.