Rajan Wilcox
Company car fuel tax, also known as fuel benefit, is a tax for employees who have a company car and free fuel for private use. Private use includes an employee’s commute between home and work, unless they are travelling to a temporary place of work. The rate includes the costs of maintenance, insurance, and fuel. There are several factors that determine how much tax is due on a company car, from the vehicle's list price to the CO2 emissions it creates and the type of fuel used.
| Characteristics | Values |
|---|---|
| Who does it apply to? | Employees who have a company car and free fuel for private use |
| What is considered 'private use'? | Journeys between home and work, unless travelling to a temporary place of work |
| What is the tax charged on? | Using the fuel paid for by the employer |
| How to calculate the tax owed? | Multiply the BIK percentage by the fuel charge multiplier |
| Fuel charge multiplier (as of 2022) | £25,300 |
| Factors influencing the tax amount | How often the vehicle is used, the type of fuel used, the amount paid towards the cost of the vehicle, the vehicle's list price, CO2 emissions |
| Tax rate on fully electric zero-emission vehicles (22/23 tax year) | 2% |
| Tax exemption | Cars modified for disabled employees, pool cars (shared company vehicles stored on the grounds and used exclusively for business purposes) |
| Reducing taxable value | Contribute up to £5,000 towards the cost of the company car |
| Calculating tax | Calculate the car's cash value and add it to the employee's salary, then tax through payroll; or declare the BIK by submitting a P11D form at the end of the tax year |
| Mileage allowance | Employees driving company cars cannot claim a mileage allowance from HMRC |
| Fuel expenses | Company car drivers can claim fuel expenses for all business mileage where the employee has paid for the fuel |
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What You'll Learn
Calculating company car fuel tax
Company car fuel tax, also known as fuel benefit, is a tax for employees who have a company car and free fuel for private use. Private use includes employees' journeys between home and work, unless they are travelling to a temporary place of work. If a company vehicle is not being used for any private use, there are steps you can take to ensure it is clear that the company vehicles don’t require taxing. This includes storing the vehicle and/or the keys on business premises, ensuring employment contracts ban private use, keeping a mileage log, and insuring the car for business use only.
If an employee uses a company car for private use, they are required to pay the company car fuel benefit. To calculate the tax owed, you can use one of the following methods:
- Calculate the car’s cash value, add it to the employee’s salary, and then tax it through payroll.
- Declare the Benefit-in-Kind (BIK) by submitting a P11D form at the end of the tax year. The BIK percentage should then be multiplied by the fuel charge multiplier to determine the tax owed. As of the 2022 tax year, the fuel charge multiplier is £25,300.
- If the employee has used a company fuel card, they must produce records that show the number of miles worth of business trips and provide proof that they have reimbursed their employer for any private miles and the VAT on the fuel costs.
- If the employee uses the company car strictly for business purposes, the value of using the vehicle is not included in the employee’s income or taxed because the employee needs it to perform their job.
- If the employer covers the cost of all fuel used, including personal journeys, the employee pays tax on this benefit.
- If the employee drives an electric car and the employer pays for charging used for personal mileage, the employee does not have to pay fuel benefit tax.
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Employee and employer tax implications
Offering a company car can be a great perk for employees, especially those on permanent contracts with jobs requiring extensive travel, such as travelling salespeople or employees working at multiple locations. However, company cars have tax implications for both the employer and the employee.
Employee tax implications
If an employee uses a company car for private use, this is considered a benefit in kind (BIK) by HMRC, and the employee must pay tax on it. Private use includes journeys between home and work, unless they are travelling to a temporary place of work. Employees can avoid paying tax on private use by reimbursing their employer for the fuel they consume during the tax year. If the employee uses the company car strictly for business purposes, the value of using the vehicle is not included in the employee’s income or taxed because the employee needs it to perform their job. Employees can also claim fuel expenses for all business mileage where they have paid for the fuel.
Employer tax implications
If an employer provides a company car and covers the cost of all fuel, including personal journeys, the employee must pay tax on this benefit. There are two ways of calculating and paying tax on a company car. The first is to calculate the car’s cash value, add it to the employee’s salary, and then tax it through payroll. Alternatively, the employer can declare the BIK by submitting a P11D form at the end of the tax year.
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Private use of company cars
Private use of a company car is regarded as a benefit or gain by the HMRC and is, therefore, taxable. This includes employees' journeys between home and work, unless they are travelling to a temporary place of work. The tax owed on a company car used for private purposes is calculated as a percentage of the car's value plus an environmental supplement. The taxable amount is calculated as a percentage of the car's value, with the percentage depending on the vehicle's list price, CO2 emissions, and the type of fuel used. For example, for the 22/23 tax year, the tax rate on fully electric zero-emission vehicles was 2%, with the rate increasing for vehicles as their emissions increase and, for hybrid vehicles, as their electric mileage capacity decreases.
If an employee uses their own car and is reimbursed for business trips, this does not count as a car provided by the employer. However, if an employee reimburses the employer for the private use of a company car, this is deemed to be a car made available by the employer. In this case, the employee must pay tax on the gain obtained from the private use of the car, which is added to their wages. The employee can deduct the gross amount paid to the employer from the amount they must pay in tax.
There are steps employers can take to ensure it is clear that company vehicles are not used for private purposes and do not require taxing. This includes storing the vehicle and/or keys on business premises, ensuring employment contracts ban private use, keeping a mileage log, and insuring the car for business use only. If employees pay for the fuel they use privately, they do not have to declare or pay fuel tax.
Employees who drive a company car can claim fuel expenses for all business mileage where they have paid for the fuel. However, business mileage for personal journeys in a company car cannot be claimed. If the employer covers the cost of all fuel used, including personal journeys, the employee pays tax on this benefit.
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Exemptions to company car fuel tax
Company car fuel tax, also known as fuel benefit, is a tax on the use of company cars for private purposes. This includes employees' journeys between home and work, unless they are travelling to a temporary place of work.
There are several exemptions to this tax. Firstly, if the car is modified for a disabled employee and is only used for trips between home and work or for work-related training, it may be exempt. Secondly, if employees purchase their own fuel or reimburse their employer for the fuel used during the tax year, they are not subject to fuel tax. Thirdly, 'pool cars', which are shared company vehicles stored on business premises and used exclusively for business purposes, are exempt unless they are used for private purposes. Additionally, if a company car is not used for any private use, there are steps to ensure it is clear that the vehicle is exempt from taxing, such as storing the vehicle and keys on business premises, including a ban on private use in employment contracts, and keeping a mileage log.
Furthermore, exemptions apply to certain types of vehicles and fuel. For example, electric cars owned or hired by the employer and provided to employees are exempt from tax. Additionally, employees can save taxes on their fuel expenses through specific programmes or allowances offered by their company. Lastly, if an employee uses a company car for business mileage, such as client visits or temporary workplace travel, this is considered a business purposes journey and is exempt from tax.
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Reducing company car fuel tax
Company car fuel tax, also known as fuel benefit, is a tax for employees who have a company car and free fuel for private use. Private use includes journeys between home and work, unless the employee is travelling to a temporary place of work. The tax is charged to the employee for using the fuel paid for by their employer, as HMRC considers it as free fuel.
Pay for private fuel use
If employees reimburse their employer for the private fuel used, they can avoid paying tax on it. This is a good option if the employee's private mileage is low, as the high tax charge may negate the benefit of employer-provided fuel. For example, if an employee's private mileage is 5,000 miles per year, and the price of petrol is £1.19 per litre, the cost of the fuel is around £520 for the year. As the actual cost of the fuel is less than the amount paid in tax (£3,182), reimbursing the company for the cost of the private fuel would save the employee £2,662.
Choose a car with lower emissions
Cars with lower emissions are taxed at a lower rate. For the 22/23 tax year, the tax rate on fully electric zero-emission vehicles is 2%, and this rate increases as emissions increase. Diesel cars, for example, attract a 4% hike in the percentage applied, capped at a maximum of 37%.
Car share
Car sharing can reduce the tax burden for employees by splitting the tax expectations.
Choose an electric car
Electric cars are taxed at a lower rate than cars that use other types of fuel.
Contribute towards the cost of the car
Employees can contribute up to £5,000 towards the cost of the company car, which will reduce the taxable value.
Store the vehicle on business premises
If a company vehicle is not used for private use, storing it on business premises can help to make it clear that the vehicle does not require taxing.
Ban private use in employment contracts
Including a ban on private use in employment contracts, along with a company car policy, can help to ensure that company vehicles do not require taxing.
Keep a mileage log
Keeping a mileage log can help to demonstrate that a company car is not being used for private use and therefore does not require taxing.
Insure the car for business use only
Insuring the car for business use only can help to demonstrate that the vehicle is not being used for private use and therefore does not require taxing.
Bulk taxing
For companies with fleets of 50 or more vehicles, the DVLA fleet scheme offers bulk taxing, which allows companies to tax all their vehicles in one transaction rather than individually. This can help to alleviate the administrative burden of maintaining a large number of vehicles.
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Frequently asked questions
Company car fuel tax, also known as fuel benefit, is a tax for employees who have a company car and free fuel for private use. This includes journeys between home and work, unless they are travelling to a temporary place of work.
To work out company car fuel benefit, you need to take your BIK (benefit-in-kind) percentage and multiply it by the fuel charge multiplier. As of the 2022 tax year, the fuel charge multiplier is £25,300.
Private use includes an employee's commute to and from work, as well as any other personal journeys. It is important to note that commuting to a temporary workplace is not considered private use.
There are a few ways to reduce company car fuel tax:
- Contribute up to £5,000 towards the cost of the company car.
- Pay the full cost of any private fuel.
- Car share to split the tax burden.
- Choose an electric car, as the tax rate is lower for zero-emission vehicles.
The Fuel Tax Credit is a refundable credit for fuel used in specific work-related activities. It is not available to most taxpayers and only applies to nontaxable uses of fuel, such as off-highway business use.
