Nowadays, it is common practice among companies to give employees company cars for both official and personal use. Some companies may up the ante and offer a company car fuel benefit on behalf of employees.
However, while the fuel may be free, it still comes at a cost. Because the HMRC sees employer-provided fuel as a taxable benefit, it requires that employees pay a company car fuel benefit.
In this article, we’ll explain the meaning of the company car fuelling benefit and why it matters.
What Does Company Car Fuel Benefit Mean?
The company car fuel benefit is a tax employees pay on fuel provided by employers for their use. You can only pay this charge if your employer fuels your company car.
Some employers may decide to implement a subsidy and reduce the burden of paying the fuelling benefit of vehicles on the employee. However, it is more common for employees to figure out how to pay the fee for benefiting from this system.
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Why You Should Care About Company Car Fuel Benefit
You should care about the car fuel benefit if you’re getting a company car. Calculating the associated charges should inform your decision to accept the benefit or not.
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“The fuel is free, why should I reject it?”, employees might ask. Well, as we explained before, that fuel isn’t really “free”—you have to pay a tax for using it.
Taking a p11d fuel benefit is worth it only if your typical fuel costs outstrip the tax. Hence, you need to calculate the benefit charge and compare it against your typical fuel costs in a year.
How Do I Calculate the Company Car Fuelling Benefit?
Calculating the p11d fuel benefit charge is pretty simple. Multiply the vehicle’s benefit-in-kind (BIK) tax by the car fuel benefit charge.
Here is a simple procedure to calculate your car’s BIK tax:
- Multiply your vehicle’s CO2 level (also called emissions band) by its P11D Value, i.e., its value when new.
- Multiply the result from the above calculation by your income tax bracket to get the BIK tax rate.
The “car fuel charge” is set by HMRC and changes yearly, so you have to confirm before calculating. The fuel charge for 2021/2022 is £24,600.
Below is a sample calculation of the fuel charge for a certain Mr. Jones:
Mr Jones drives a car in the 100-104 CO2 emissions band, pegging his BIK rate at 24%.
Then he multiplies the BIK rate (24%) by the car fuel charge (£24,600) and gets £5,904.
Afterwards, he has to multiply this figure by his tax margin (based on his income bracket) to get his fuel benefit.
His tax margin is 40% which, if multiplied by £5904, gives him a figure of £2,361—his fuel benefit charge.
If Mr Jones is a prolific traveller and spends more than £2,361 on fuel, then paying the P11d fuel benefit is sensible. However, taking that benefit would be imprudent if Mr Jones pays less than £2,361 on fuel per year.
What Is P11D Value?
P11D value refers to its total value of a company car as the time you got it from your employer. The name comes from the form (P11D) that requires employers to list benefits allotted to employees.
The P11D value of a car includes its listed price (cost of purchase) and value added tax (VAT). While calculating the P11D value, you have to include the cost of any additions to the car.
For instance, if the employer paid for optional equipment, say, chrome wheels, you must include it in the P11D value.
While you’re required to add VAT paid on the vehicle, the first road tax and registration tax must be excluded. This is based on HMRC regulations.
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Why Is P11D Value Important?
HMRC considers company cars a taxable benefit, and the P11D value is used in calculating how much company tax you have to pay.
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To calculate the company car tax, you have to multiply the P11D value by your income tax rate (usually 20% or 40%). Then multiply the result by your vehicle’s benefit-in-kind tax band (based on its CO2 emissions) to get the company car tax.
It is advisable to select vehicles with a lower P11D value, as these command a lower company car tax. This means leaving out add-ons when buying the company car.
fuellingExcept your employer plans to subsidise fuelling tax fees, understanding how the benefit system works is crucial. That way, you’ll be able to judge whether to opt for the benefit or stick to fueling the car yourself.
Your company car’s P11D fuel benefit matters. Knowing how the P11D value contributes to your company tax and how to use this to your advantage will reduce your tax bill.