IR2 INCOME TAX: COMPANY CARS AND CAR FUEL 1995/96 The Chancellor proposes in his Budget to increase the scale charges for fuel provided for private motoring in company cars by 5 per cent for petrol cars and 4 per cent for diesel cars. The Chancellor's intention is to increase the tax charge on the benefit of free fuel in line with the increases for other drivers who pay for their own fuel. The new charges will take effect from 6 April 1995. The proposed changes to the car fuel scales will yield pounds 10 million tax in 1995/96 (pounds 10 million tax and pounds 5 million National Insurance Contributions in a full year). DETAILS The table on the following page shows the revised scale charges and the additional weekly tax payable. CAR FUEL SCALE CHARGES Engine Size Scale Charges Scale Charges Increased cc for 1994/95 for 1995/96 weekly tax (Basic Rate Taxpayer) I. PETROL pounds pounds pence 0-1,400 640 670 14 1,401-2,000 810 850 19 2,001- 1,200 1,260 29 II. DIESEL 0-2,000 580 605 12 2,001- 750 780 14 III. Cars 1,200 1,260 29 without a cylinder capacity Implementation The new scale charges will be implemented by Treasury Order, taking effect from 6 April 1995. PAYE codes containing an adjustment for car fuel benefits will be reviewed and amended automatically. NOTES FOR EDITORS 1. Directors and employees earning at a rate of pounds 8,500 a year or more (including the value of expenses payments and benefits in kind) are taxable on benefits in kind. The value of the benefit (its "cash equivalent") is added to the taxpayer's income and taxed at the appropriate marginal rate. 2. The cash equivalent of free fuel provided for private motoring is fixed by reference to three bands of engine size - 1,400 cc or less, 1,401 cc to 2,000 cc, and over 2,000 cc. There are lower scale charges for diesel cars on the basis of two engine size bands - 2,000 cc or less, and over 2,000 cc. 3. The new scale charges give the amounts on which employees will pay tax in 1995-96. The charge is apportioned if a company car is available for only part of a year. The charge is reduced to nil if the employee makes good the cost of all the fuel used for private journeys. Journeys between home and work are usually regarded as private motoring. 4. The proposed increase in the petrol scale charges is 5 per cent, and 4 per cent in the diesel scales. This will affect in round terms nearly one million directors and employees - just over half of the directors and employees who have a company car. 5. A company car driver, paying basic rate tax, and driving a 1,600 cc car for which petrol is provided for private motoring will pay pounds 4.08 a week in tax on the private fuel benefit in 1995-96 compared with pounds 3.89 in 1994-95. For a diesel car a similar driver will pay pounds 2.91 a week in 1995-96 compared with pounds 2.79 in 1994-95. 6. The car fuel scales are also used: to assess VAT due on fuel provided out of business resources for private motoring by registered traders and their employees. (See Press Release issued today by Customs and Excise); as the basis for employers' Class 1A National Insurance Contributions. The new scale charges will be used for 1995-96. The Department of Social Security will be issuing guidance to employers in due course. 7. Reference to company cars in this Press Release extend to all cars made available for private use to employees (and their families) by reason of their employment. Company cars: cash alternatives 8. The Chancellor announced, in answer to a Parliamentary Question on 21 July 1994, that he proposes legislation in the forthcoming Finance Bill to ensure that, from 6 April 1995, where a car would otherwise be within the special income tax rules for company cars; and an alternative to the benefit of that car is offered the mere fact that the alternative is offered will not make the benefit of the car chargeable to tax under the general income tax rules. The result will be that the employee will then pay tax on what he or she actually gets - car benefit or cash. Employers will also pay National Insurance Contributions as appropriate - Class 1A on the benefit of a car or Class 1 on cash. 9. Details of the announcement were given in an Inland Revenue Press Release on 21 July 1994.