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Considering the fuel for a company car based on tax

If you’re thinking of introducing company cars as a perk for your employees then on first look, the tax obligations can seem daunting. We look at the taxes that apply and help you consider the best fuel types for company cars.
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Traditionally, diesel cars have represented the best value for company car drivers, but could electric cars and the tax breaks they attract make them a better deal? Let’s take a look.

Understanding company car tax

One of the most important factors to consider when determining the best fuel type for a company car is the tax that has to be paid. The tax levied on company cars is called Benefit-In-Kind (BIK). The rates of BIK tax are determined primarily by a car’s CO2 emissions.

However, the price of the company car combined with the personal rate of tax the employee pays, whether it’s 20%, 40% or 50%, also plays a part.

Previously, due to their zero CO2 emissions, electric cars were exempt from taxation, but as they have become more popular, they have been included at a substantially lower rate. That means hybrid and full-electric cars can be appealing. Diesels have had an additional 4% surcharge, which could bring their time as the company car of choice to an end.

Employers can use HMRC’s company car tax calculator to work out how much tax has to be paid on different vehicle types.

Other factors to consider

Although tax incentives make hybrid and electric cars appealing, there are other factors to consider. It goes without saying that initial budget, quality and size of vehicle will all play a part in your decision, but it’s also important to consider things like:

● Depreciation
● Fuel costs
● Maintenance and repair costs
● Insurance group
● Road tax
● Environmental impact

Taking all those factors into account, how do the different fuel types compare…

Petrol vs Diesel

Petrol and diesel vehicles have many similarities, but given the 4% BIK tax surcharge on diesel cars, you need to consider whether you’ll do the necessary mileage (diesels are more fuel efficient) to cover the additional tax costs. You should also factor in the higher purchase price of a diesel vehicle in the first place.

Diesel vehicles also tend to depreciate more quickly than petrol cars, but they do last longer and have lower lifetime costs. If a vehicle’s green credentials are important to you then diesels produce more greenhouses gases than all the other fuel types, making their environmental footprint considerably larger.

Electric vs Hybrid

If emissions and low tax costs are important to you then you’ll be better off with a hybrid or electric vehicle. Hybrid vehicles emit more emissions than pure electric cars but they still benefit from lower tax bills and congestion charges.

A potential sticking point with hybrid and electric cars is their initial cost, which tends to be higher than petrol or diesel equivalents. However, this should be balanced by their excellent resale values.

The best electric cars are now able to cover up to 150 miles on a single charge, but this can still be restrictive if your employees have to travel long distances. However, if employees predominantly do shorter trips then with no emissions, no fuel costs and low tax, electric vehicles could be the right fuel type for you.

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As the champion of UK enterprise for 20 years, Real Business is the most-read SME website dedicated to high-growth businesses and entrepreneurs. Through daily news, unique insight and invaluable guides we are an essential resource for thriving businesses.

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