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Free fuel costs more in tax

Almost a quarter of a million drivers receive free fuel as a business benefit that, due to the high taxation associated with the perk, actually costs more in tax than if the fuel was bought directly by themselves.

HMRC has revealed that for more than a decade, incremental increases of tax on this so-called ‘zombie benefit’ has, since 2004, reduced by 41 per cent the number of drivers utilising it. Those who still do not only pay £250m in tax, but their employers are also penalised to the tune of £100m for National Insurance Contributions in addition to the fuel cost itself.

Employees receiving this benefit are taxed on a percentage of a predetermined value. The value for this tax year 2012/2013 is £20,200 and drivers pay a percentage related to the CO2 emissions of their car. HMRC figures also reveal that 61 per cent of vehicle drivers receiving the benefit are in the higher tax band. This means they pay more tax and their employer pays higher National Insurance Contributions, so drivers have to cover a significant mileage to break even.

Research has shown that most companies have reported significant benefits by eliminating free fuel for their employees. This does not relate solely to cost savings; it also relates to an appreciation that the overall investment in providing this ‘perk’ is significantly greater than the value received by the employee.

It would, therefore, seem to make very good sense for a small business owner to discuss matters with an expert first, such as a cheap accountant for contractors, before plunging in to offer employees financial incentives such as ‘free fuel’.

Posted by Peter
September 17, 2012

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