Cut driving costs by getting a company car

26 May 2011

Company cars have persisted in the UK, despite an increasingly complex tax system. Astonishingly, they still account for around half the new cars bought every year.

Slugging it out at the top of the table are the Ford Focus and Vauxhall Astra (number one for 2010), while the private sales chart reveals that when we spend our own money on cars, we go for smaller superminis like the Ford Fiesta and VW Polo.

This suggests we'd all probably choose a larger car - if someone else was paying.

Who benefits?

Initially, company cars were only given to those who needed them. But, over the years, the scheme has been widened to reward certain employees, and, in some companies, expanded to include everyone.

Toby Poston, spokesperson for the British Vehicle Renting and Leasing Association, explains: "Salary-sacrifice schemes, where an employee gives up part of their salary in return for a non-cash benefit from their employer, have become increasingly popular."

A car is perfect for this sort of arrangement, due to its practicality. The firm's car fleet department uses its manufacturer contacts to get a good deal for the employee, then hands them an insured car, with all the servicing taken care of.

And there are tax savings to be made too: the VW Polo example from lease company Inchcape (see below) saves just over £100 in income tax every month (before company car tax).

Tax savings

The downside is company car tax. Designed to penalise higher-consumption motors, it bands cars according to their CO2 output (another way of expressing fuel economy). That gives a percentage figure, from which you work out what you pay based on the car's list price.

These bands have been tightened over the years by successive governments, and this has had a big impact on buying trends.

According to the Society of Motor Manufacturers and Traders, the average CO2 consumption of company cars has fallen from 157g/km to 137g/km over the past four years. Despite company cars generally being larger than privately bought cars, the CO2 consumption is lower on average.

This is because family cars are now offered with highly economical diesel variants whose 75 miles per gallon (mpg) consumptions drop them into the low 13% company car tax band. These bands go up to 35% for gas-guzzlers.

Our VW Polo example, with its relatively economical 1.2-litre petrol engine, would cost a basic-rate taxpayer £26 a month, which still brings monthly tax savings of £75.

The Budget offered more enticements to buy economical cars. A new 5% band for car engines recording 75g/km or less (over 100mpg) is to be introduced - and if you buy one of the new-generation pure electric cars, you won't pay any tax at all.

Any other downsides?

The disadvantage of choosing a company car, however, is the restricted personal choice. Again, if the car is used for work, there will be rules about how it's operated: for example, a ban on smoking in the car. And, of course, the scheme doesn't favour bigger-engined variants, which won't please everyone.

Free fuel from your employer is taxed too. The tax is worked out by a complicated system that's based on multiplying an arbitrary figure (which has risen to £18,800 in the Budget) by the vehicle's tax band (in percentage). According to the Energy Savings Trust, you would need to be driving over 12,000 private miles a year to benefit.


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