D-day approaches for company car drivers

  • The tax arrangements of all company car drivers will change on 6 April 2002, when a new regime, based on carbon dioxide emissions, comes into place.

  • Although most experts predict the majority of drivers will be no worse off, those currently using big cars and covering over 18,000 business miles annually could be left out of pocket.

  • The choice of company car is critical, as emissions vary widely and the tax regime will get stricter each year.

  • The new emissions-based tax regime for company cars is just weeks away. We investigate the likely impact and identify the potential winners and losers.

    The tax arrangements of nearly two million company car drivers are set for fundamental change on 6 April when the government's much-publicised new regime, based on carbon dioxide emissions, comes into effect (see box and table 1). According to some analysts, the changes will deplete the take-home pay of large numbers of employees. But is this really the case?

    As we reported in our major feature on the new tax treatment for company cars (Pay and Benefits Bulletin 498, within IRS Employment Review 706 - see Cash or car? ), experts suggest that around a third of drivers may be worse off, especially those who drive high mileages and who under the current system receive a discount on the tax charged.

    Current research from specialist fleet operator Lex Vehicle Leasing paints a similar picture1. Lex says that once the dust has settled in July, 70% of drivers will either be no worse off, or better off, because of the emissions-based regime.

    Based on an analysis of its own fleet - assuming 15,000 business miles and 10,000 private miles a year - Lex says there is little for the majority of car users to fear. And for some, the new arrangements will actually significantly reduce the tax bill. For example, a 40% taxpayer who drives a £20,000 diesel car attracting an 18% tax band (the lowest possible for diesel-engined vehicles under the new rules) will be £1,360 a year better off from April.

    Table 1: Ready reckoner of car benefit charges during the first three years of the reform

    CO2 emissions in grams per kilometre (g/km)1

    Percentage of car's list price taxed (%)

    Diesel supplement (%)

    2002-2003

    2003-2004

    2004-2005

    165

    155

    145

    15

    3

    170

    160

    150

    16

    3

    175

    165

    155

    17

    3

    180

    170

    160

    18

    3

    185

    175

    165

    19

    3

    190

    180

    170

    20

    3

    195

    185

    175

    21

    3

    200

    190

    180

    22

    3

    205

    195

    185

    23

    3

    210

    200

    190

    24

    3

    215

    205

    195

    25

    3

    220

    210

    200

    26

    3

    225

    215

    205

    27

    3

    230

    220

    210

    28

    3

    235

    225

    215

    29

    3

    240

    230

    220

    30

    3

    245

    235

    225

    31

    3

    250

    240

    230

    32

    3

    255

    245

    235

    33

    2

    260

    250

    240

    34

    1

    265

    255

    245

    35

    0

    1The exact CO2 figure is rounded down to the nearest 5 grams per kilometre (g/km).

    Source: Inland Revenue

    Choice of vehicle is key

    Unlike the example cited by Lex, relatively few drivers currently use cars that attract the minimum tax liability under the new rules. As table 2 shows, the emissions ratings from the Vehicle Certification Agency vary significantly for the different types of cars typically used by companies - and this means that employees' tax burdens will also vary widely.

    According to most experts, drivers racking up more than 18,000 business miles a year - who currently pay tax on 15% of the car's list price - are most likely to end up worse off, unless they drive low-emission vehicles. "The worst-case scenario will apply to drivers of large, expensive, uneconomical CO2-belching cars currently covering more than 18,000 business miles a year", argues the Financial Times2. It cites the example of a 40% taxpayer driving a BMW 735i, a vehicle that currently attracts an annual tax charge of £2,829. Under the forthcoming regime, the employee will pay tax on the maximum 35% of the car's list price, because this model has a high emission figure of 298 g/km. This leaves a whopping tax bill of £6,602, more than double that charged presently.

    "Even the drivers who make up the core fleet segment - those who pound Britain's motorways in their Ford Mondeos or Vauxhall Vectras covering 18,000 or more business miles a year - face being a couple of hundred pounds out of pocket," the Financial Times adds.

    The upshot of all of this is that affected employees need to be educated about the new tax regime, especially as most of them now have at least some choice over the company car they drive. And given that most will keep the car in question for two or three years - by which time the emissions-based regime will be stricter - consideration needs to be given not just to the tax position this April, but also in the years ahead.

    A quick glance at table 2 reveals the following broad trends among so-called upper medium cars, which make up the bulk of company fleets:

  • despite the 3% surcharge, most diesel cars attract a lower tax charge than petrol-engined equivalents;

  • the least-polluting diesel cars - such as the BMW 320D, Volkswagen Passat TDi and Volvo S40 1.9D - meet the minimum emissions target in the 2004/05 tax year, meaning that there is no increase in the tax charged over the next three tax years;

  • by contrast, most petrol engined cars see a year-on-year rise of 2% in the tax charged ; and

  • cars with bigger engines or higher power outputs attract a much larger tax charge.

    Table 2:Tax charges on upper medium cars (manual transmission)

    make and model

    CO2 emissions, g/km1

    % of list price to be taxed

    2002/03

    2003/04

    2004/05

    Audi A4 1.6

    190

    20

    22

    24

    Audi A4 1.9TDI

    154

    18

    18

    19

    BMW 316i

    188

    19

    21

    23

    BMW 320D

    148

    18

    18

    18

    Citroen C5 1.8

    182

    18

    20

    22

    Citroen C5 2.0 HDi 90hp

    152

    18

    18

    19

    Ford Mondeo 1.8i

    185

    19

    21

    23

    Ford Mondeo 2.0 TDdi

    164

    18

    19

    21

    Honda Accord 1.8i VTEC S

    189

    19

    21

    23

    Jaguar X-type 2.5

    244

    30

    32

    34

    Lexus IS200

    233

    28

    30

    32

    Mercedes Benz C180

    227

    27

    29

    31

    Mercedes Benz C220 CDI

    170

    19

    21

    23

    Peugeot 406 1.8

    182

    18

    20

    22

    Peugeot 406 2.0 HDi 90hp

    150

    18

    18

    19

    Renault Laguna 1.6 16v

    173

    16

    18

    20

    Renault Laguna 1.9 dCi

    150

    18

    18

    19

    Rover 75 1.8

    185

    19

    21

    23

    Rover 75 2.0D

    163

    18

    19

    21

    Saab 9-3 2.0 turbo

    201

    22

    24

    26

    Seat Toledo 1.8

    192

    20

    22

    24

    Toyota Avensis 1.8 VVTi

    194

    20

    22

    24

    Vauxhall Vectra 1.6i DTi 16v

    171

    16

    18

    20

    Vauxhall Vectra 2.0 16v

    157

    18

    18

    20

    Volkswagen Passat 2.0

    206

    23

    25

    27

    Volkswagen Passat 1.9 TDi

    149

    18

    18

    18

    Volvo S40 1.8i SE

    164

    15

    16

    18

    Volvo S40 1.9D

    142

    18

    18

    18

    Figures available at www.vcacarfueldata.org.uk

    Alternatives

    When the government announced its reform of company car taxation, some observers predicted a revolution in the way cars would be provided to employees. As D-day approaches, it looks like such claims were a little exaggerated, although there is evidence of some change in the way organisations are approaching this key aspect of benefits provision.

    Perhaps the biggest development thus far has been the growth of cash allowances paid in lieu of a company car. According to major research from consultancy Monks Partnership, 75% of employers presently offer the choice of cash instead of a car, with high levels of take-up among employees (Pay and Benefits Bulletin 521, within IRS Employment Review 729). Similarly, benefits adviser Alan Jones & Associates suggests the incidence of cash allowances rose from 60% in 2000 to 70% in 2001 (Pay and Benefits Bulletin 524, within IRS Employment Review 732 - see Firms change car policies to accommodate C02 legislation). In addition, it says just under one in 10 organisations now specifies that employees should use a low-emissions car.

    Company car taxation3

    Before 6 April 2002
  • The tax charge on a company car is based on the following percentages of the price of the car:35% for annual business mileage less than 2,500 miles;

  • 25% for annual business mileage of 2,500 to 17,999 miles; and

  • 15% for annual business mileage of 18,000 miles or more.

    Older car discounts - for a car four or more years old at the end of the tax year, the car benefit charge for the appropriate mileage band is further reduced by one quarter.

    Second cars - the tax charge on second cars is generally on 35% of the price of the car. Where, exceptionally, the second car is also used for at least 18,000 business miles in the year, the charge is 25% of the price of the car.

    From 6 April 2002

    From 6 April 2002, the charge on the benefit of a company car is to be graduated according to carbon dioxide (CO2) emissions, and the reductions for business mileage, older and second cars will no longer apply.

    Cars with an approved CO2 emission figure - the charge will build up from 15% of the car's price, for cars emitting CO2 at or below a qualifying level, in 1% steps for every additional 5 grams per kilometre (g/km) over that level. For 2002/03, cars that emit 165 g/km or less qualify for the 15% minimum charge. The qualifying level will gradually be reduced as cars get more fuel-efficient (see table 1). The maximum charge will be on 35% of the car's price.

    Diesel cars with an approved CO2 emission figure - these will be treated as above but also subjected to a 3% supplement. The maximum charge remains 35%.

    Cars with no approved CO2 emissions figure - these will be treated according to the engine size as follows: up to 1,400cc, tax charged on 15% of list price; 1,401cc - 2,000cc, 25%; and 2,001cc and above, 35%.

    Older cars - cars registered before 1 January 1998 will also be taxed according to engine size as follows: up to 1,400cc, tax charged on 15% of list price; 1,401cc - 2,000cc, 25%; and 2,001cc and above, 35%.

    Cars with no recognised cylinder capacity and no approved figure of CO2 emissions - will be taxed on 35% of the car's price (or 32% if the car was registered before 1 April 1998), unless it runs solely on electricity, in which case the charge will be on 15% of the car's price.


    1 Further details available from Peter Knights on 01628 896741, or at www.lvl.co.uk

    FT Auto: Fleet Management, 11 October 2001

    The price of a car for tax purposes is the list price of the vehicle and is the same under both the old and new schemes.