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Mileage allowance versus free fuel
A frequently asked question is: would I be better off giving up
the company car and instead claiming mileage allowance for the
business travel I do in a car that I buy myself? The rule of thumb
answer to this is that you are more likely to be better off if your
annual business mileage is high.
Another frequent question is: would I be better off having
my employer provide me with fuel for private journeys, free
of charge, and paying tax on the benefit, or bearing the cost
myself? In this case, the rule of thumb answer is that you are
only likely to be better off taking the free fuel if your annual
private mileage is high. However the cost to the employer of
providing this benefit is likely to be high.
Every case should be judged on its own merits, and considered
from both the employee’s and the employer’s point of view.
While cost is an important factor, it is not the only one. As an
employee, using a company car removes the need to worry
about bills or the cost of replacement. As an employer, running
company cars allows you to retain control over what may, for
your business, be key operating assets.
Private mileage
If your employer provides fuel for any private travel, there is a
taxable benefit, calculated by applying the same percentage
used to calculate the car benefit to the fuel benefit charge
multiplier of £22,200.
You can avoid the car fuel charge either by paying for all fuel
yourself and claiming the cost of fuel for business journeys
at HMRC’s fuel only advisory rates, or by reimbursing your
employer for fuel used privately using the same rates.
From 6 April 2017 there will be a 2% increase in the percentage
applied by each company car band up to the maximum of 37%,
with a similar increase in 2018/19. The 3% diesel supplement
was set to be removed in April 2016. However, it will now be
retained until April 2021, when EU-wide testing procedures will
ensure new diesel cars meet air quality standards even under
strict real world driving conditions.
What about a company van?
Many employers and employees have benefitted from
significant savings by replacing company cars with
employee-owned cars part-funded by mileage allowances at
HMRC rates. Where a company vehicle is still appropriate, a van
rather than a car is worth considering.
Unrestricted use of a company van results in a taxable benefit of
£3,170, with a further £598 benefit if free fuel is also provided.
Limiting the employee’s private use to only home to work travel
could reduce both figures to zero.
Case Study
Mila is an owner-director. For her company car she had chosen
one with a list price of £25,785. The car runs on petrol and
emits CO
2
at a rate of 148g/km. The resulting tax bill can be
up to £5,614, with an NIC bill for the employer of £1,722.
Mila’s company is successful and she pays tax at 45%. Her
2016/17 tax bill on the car is therefore £3,017 (£25,785 x
26% x 45%). Mila’s company will pay Class 1A NICs of £925
(£25,785 x 26% x 13.8%).
The company also pays for all of Mila’s petrol. Because she
does not reimburse the cost of fuel for private journeys,
she will pay tax of £2,597 (£22,200 x 26% x 45%) and the
company will pay Class 1A NICs of £797 (£22,200 x 26% x
13.8%).
The total tax and NIC cost is £7,336. Furthermore, as well as
paying for the fuel, the company will also need to pay a gross
amount of over £10,592 to provide Mila with the funds to pay
the tax and employee NICs.
When employers’ national insurance is taken into account, the
gross cost before tax relief of funding Mila’s tax and the NIC
liabilities will be over £13,776.
Childcare vouchers
The Government will begin rolling out the new Tax-Free
Childcare scheme from early 2017. Until then, childcare
vouchers offer working parents a way of reducing childcare
costs, and there is still an opportunity to join an employer
scheme before the new system comes fully into effect.
The childcare voucher system will close to new entrants in
April 2018.
Trivial benefits
From 6 April 2016, a statutory exemption from income tax and
NICs applies to qualifying trivial benefits in kind costing £50 or
less. The new exemption does not apply to benefits provided
under a relevant salary sacrifice arrangement.
Such benefits provided to directors and other office holders of
close companies, or members of their families or households,
are subject to an annual cap of £300.
Your next steps: contact us to discuss…
•
PAYE and payroll issues
•
Ensuring you have the correct PAYE code
•
Putting together an attractive and tax-efficient
remuneration package
•
Cutting the cost of company cars, and reviewing the
alternatives
•
Minimising NIC costs and understanding the tax
implications of company cars