For the majority of business car drivers, receiving ‘free’ fuel as part of their employment package is a bad deal. The Energy Saving Trust’s Nigel Underdown explains. Thousands of company car drivers continue to receive company funded fuel for private use.

But almost all would be better off – and so would their employer – if they gave up the ‘benefit’.

Ironically it’s known as ‘free’ fuel. But for the majority of company car drivers and businesses it is in fact the most expensive petrol and diesel they will buy.

Financial experts advise the wholesale withdrawal of the ‘perk’.

Cost-conscious employers should consider whether to fund staff to travel in their own time at the company’s expense.

Tax policy aims to drive out ‘free’ fuel

Since the late 1990s the government has gradually increased the scale charge on ‘free’ fuel.

But HM Revenue and Customs says 380,000 employees still pay tax on company-funded fuel for private use. Even though most employees would be better off giving up the ‘perk’. And paying for private fuel themselves.

In April 2003 the ‘free’ fuel tax system was changed. It is now based on a company car’s carbon dioxide emissions (the same percentage figure used to calculate the car benefit charge) multiplied by a set figure for the tax year. Until 06 April, 2008, that set figure was L14,400. But has now been increased to L16,900.

For many people, the tax on their private fuel will be greater than the tax they pay on their company car.

Case study

For example, Bill is a 40% taxpayer in a small business. He drives a modest five-door Ford Focus 2.0 Zetec as a company car.

The Focus returns 40mpg on the combined fuel cycle; emits 169g/km (a 21% tax banding); and Bill travels 10,000 private miles a year.

In 2008/9 Bill will pay L1,419.60 in tax for receiving ‘free’ fuel: that’s L16,900 x 21% = L3,549 multiplied by 40%.

If Bill travels 10,000 miles a year, he will use 250 gallons of petrol.

With petrol costing an average 89.5p a litre (L4.07 a gallon), according to the AA, it would cost him L1,017.50 a year at the pumps if he paid for the fuel out of his own pocket – a saving of L402.10. (The calculation is private miles driven multiplied by the price per gallon and divided by mpg.)

The government has announced that from 06 April, 2009, the multiplier will increase at least by the rate of inflation each financial year.

This tax strategy is designed to encourage drivers to give up the ‘benefit’. And travel fewer miles by paying for petrol and diesel themselves – while simultaneously supporting the government’s emissions-based motoring fiscal strategy.

Further information

For more on free fuel, go to our Law & Tax section for Tax: how to work out free fuel

For more fuel-saving advice from the Energy Saving Trust, visit www.energysavingtrust.org.uk