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Including greener cars in a company car fleet is a sure-fire way of slashing tax bills for the employer and employee alike

The simplest way to slash your fleet’s tax bill is to buy greener cars. Back in 2002, the government changed the way company cars were taxed in a bid to encourage drivers to pick more environmentally-friendly models.

Before this, tax was based on annual business mileage. Now, the lower the car’s CO2 emissions, the lower the tax.

David Rawlings, senior manager at accountancy firm Deloitte, says: “Since tax is an integral cost in running a car; employers that don’t factor tax into the whole life cost of the cars in their fleet will be making very expensive mistakes.”

Currently, company car tax is charged on a sliding scale between 15% and 35% of the list price. However, from April, there will be a new 10% tax for cars with super-low CO2 emissions below 120g/km.

So, employees with an eco-friendly vehicle with tiny emissions will be able to get away with tax as low as 10%, while those with the most polluting cars will face a hefty 35% tax. Diesel cars attract an additional 3% tax, because, while they release less CO2, they are a source of particulate and smog-forming pollution. However, this extra charge can’t push the maximum total charge above 35%. While hybrids attract a 3% discount, the downside is that they tend to cost more to buy than petrol models, so pushing up the tax which is based on the list price.

Emissions are also a consideration for the employer. It is required to pay national insurance as a percentage of the P11D value of the car, which itself has been worked out by applying a rate linked to CO2 emissions to the list price.

Employers offering green cars benefit from lower vehicle excise duty (VED). As low-emission cars use less fuel, the employer’s tax bill on fuel purchases is also reduced.

Ray Chidell, managing director of tax consultancy Claritax and author of Company cars: practical tax planning, says: “The question of whether or not it is tax-efficient for an employer to provide a company car has been agonised over at length by many accountants. There is no right or wrong, as the answer depends on so many variables such as the type of car, business miles, and [even] the London congestion charge.”

Future of Ecops

In the past, employees who have been able to buy a vehicle through an employee car ownership plan (Ecop) have not only benefited from their employer’s buying power but have also avoided paying any benefit-in-kind tax.

Gary Hull, a chartered tax adviser at PricewaterhouseCoopers, says: “With Ecops the employee saves money from not having to pay tax on the company car charge. [And] the employer saves money where the cost of providing the allowance is less than the cost of providing a company car.”

But Ecops’ days are numbered, say experts. Employers are currently able to reimburse staff who use their own car for work at 40p for the first 10,000 miles and 25p after that, free of tax and national insurance. Many employers use these approved mileage allowance payments to help employees fund their cars through Ecops. Yet, HM Revenue & Customs is reviewing the rates and could penalise those using inefficient vehicles.

Deloitte’s Rawlings believes the government wants employers to move back to traditional schemes away from Ecops. “It is likely that HMRC will change the tax-free allowances. They are the cornerstone of these schemes but they encourage employees to drive more business miles, flying in the face of the government’s green agenda.”

Doing the sums:†

Gary Guzzler

Gary is a high-rate taxpayer with a Lexus LS saloon costing £57,000. He pays £7,980 in tax. This is because the car emits a massive 261 grams of CO2 per kilometre driven – putting it in the top 35% band.

Lucy Lightfoot

Lucy is a low-rate tax payer with a Toyota Prius, a hybrid car emitting 104 grams of CO2 per kilometre. The tax is worked out at 12% of the car’s cost and, as a low-rate tax payer, she pays 22% on this sum – £470. After April 2008, however, she will fall into the new 10% bracket, and will pay just £350. The 3% hybrid discount does not apply to cars in the lowest 10% tax band.

Andy Average

Andy drives a Ford Mondeo diesel hatchback, which generates 163g/km. As a high-rate taxpayer he pays £1,500 tax on a list price of £17,000. This is because, while the car’s 163g/km puts it in the 19% tax band, an extra 3% is added for a diesel car, totalling 22%.

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