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Repay private petrol and save tax

Repay private petrol and save tax

Stuart Datlen

Is the myth of having your private fuel costs for your company car covered by your employer being a good thing, true? Or is there a tax bump in the road? And for the purpose of this blog that tax bump will be known as the Car Fuel Benefit charge. 

At the end of the current tax year (5 April 2021), the mathematics below demonstrates how a cash payment to an employer to payback any private fuel provided can create overall cash savings. This might not apply to all company car drivers, but it is worth checking to see if a repayment is possible.

If we follow this scenario:

•    list price of your company car when new was £30,000
•    your employer pays for all your private fuel
•    CO2 emissions are 147 g/km, and 
•    the car has a diesel engine, 2000 cc.

The 2020-21 benefit in kind charge for the use of the car (this is added to your taxable income for the year) is £10,200. This would cost a standard rate taxpayer £170 a month in Income Tax.

But then the provision of private fuel would trigger an additional Car Fuel Benefit charge of £8,330. This would cost a standard rate taxpayer an extra £138 a month.

It is possible to reimburse your employer for private fuel provided and avoid this Car Fuel Benefit charge completely. Here is how to do it:

•    Firstly, calculate your private mileage for the 2020-21 tax year. Estimates won’t be good enough, you will have to create evidence, e.g. a mileage log.

•    Multiply this private mileage by HMRC’s Advisory Fuel Rate. The present rate per mile is updated quarterly and set out on the government website with rates moving according to fuel prices.

Now the information is there we can start doing some calculations. Following the scenario, if the driver’s private mileage was 6,000 miles during 2020-21 accruing evenly at 500 miles per month and assuming the rate will not change from 1 March 2021, the amount that needs to be repaid to the employer   is £595 (2 months at 11p per mile, 3 months at 9p and 7 months at 10p) . That comes out at just under £50 per month. 

Following on, for an outlay of £595, the car driver – if a basic rate tax payer – will save £1,666 in tax (£8,330 x 20%). That would be an overall cash saving of £1,071.

If you are receiving private fuel from your employer, or providing private fuel for your employees, it could be worth looking at your own numbers to see if there is a cash advantage to repaying any private fuel. If there is an intention to reduce the fuel benefit charge for 2020-21 to nil repayment must be made by 6 July 2021.

For employers

The car fuel benefit charge not only creates a tax charge for the employee it also creates a National Insurance charge for the employer. And so, allowing employees to repay their private fuel costs will also reduce your NIC costs. In addition the business obviously benefits from the reimbursement of the cost. A classic win-win outcome. 

If you require assistance with the above, such as the maths or reporting processes, please get in contact with your local Moore (South) office.