Feature – Is free fuel the best option for your staff?

Heavy taxes mean free fuel is not always financially beneficial for employees, but calculating who to offer it to can be a tricky business, says Nicola Smith

If you read nothing else, read this …

  • Look at each employee’s case on an individual basis – one size doesn’t fit all.
  • Hold regular reviews to take account of employees’ changes in circumstances.
  • If you scrap free fuel, make sure you get your business mileage reimbursement rates spot on.

Ever since the government introduced CO2 emissions tax, calculating whether free fuel is financially beneficial for employees has become a complex issue. The perk might sound attractive, but it is heavily taxed resulting in higher national insurance contributions (NICs) and, in some cases, higher benefit-in-kind tax bills for employees. Drivers now pay benefit-in-kind tax on a percentage of £14,400, which is calculated based on car emissions.

Vehicle management services provider Arval PHH estimates that 500,000 drivers still opt for free fuel in the UK, yet for many it may be uneconomical. Robert Pieczka, marketing director at Arval PHH, says: "The tax changes that took place a few years ago prompted many drivers to replace their company vehicles with CO2-efficient ones. The 2003 tax changes meant people driving a CO2-efficient vehicle with few private miles would be losing out. People moved away from free fuel."

But calculating whether free fuel is financially beneficial for an organisation is not straightforward. Brecon Quaddy, a spokesman for fleet finance company Alphabet, says: "A lot of employers would like to be able to make a simple decision – do we offer free fuel or not? But one solution won’t suit every employee."

Drivers who live a reasonable distance from their workplace and therefore have high private mileage but don’t have CO2-efficient cars are the most likely to benefit from free fuel. As «etin Suleyman, a partner at tax specialist Goodman Jones, points out: "A middle-of-the-road exec driving a car that emits 195g/km of CO2 would have to drive 10,000 miles a year (or, for example, live over 20 miles from their place of work) for it to be worth them having free fuel."

But there are also a number of high-earning employees who continue to opt for free fuel through indifference. "There’s still a lack of understanding. Drivers on higher salary thresholds often can’t be bothered to do the calculations," says Arval PHH’s Pieczka.

Employers need to talk to their employees and look at each case on an individual basis, as well as holding regular reviews. "Every time the employee changes their car or moves house, the employer needs to review their fuel position," says Alphabet’s Quaddy.

Beyond this, bosses need to decide if they are going to offer free fuel at all. But if employers decide to scrap the option, what alternatives can they offer? "You can choose to buy employees out, phase out free fuel or simply give drivers a choice based on proper calculations," says Pieczka.

If employers withdraw the free fuel option, they also need to work out how to handle the business mileage reimbursement. The Inland Revenue states that if employees don’t receive more than 12p per mile for petrol cars and 9p per mile for diesel cars, they are not deemed to be making a profit and, therefore, will not be taxed. Quaddy explains: "It is very important to make sure you have got your mileage rates right to avoid tax implications."