Fleet decision-makers are under renewed pressure to review policy on provision of free fuel for fleet drivers.

The Energy Saving Trust says thousands of employees continue to receive company funded fuel for business and private use.

But, according to the EST, almost all would be better off - and so would their employer - if they gave up the 'benefit'.

For the handful of employees who will lose out, a compensation package could be agreed, it says.

Nigel Underdown, head of transport advice at the EST, said: “Ironically known as 'free' fuel, for the majority of company car drivers and businesses it is in fact the most expensive petrol and diesel they will buy. 

“In these cost-conscious times, fleet managers should consider whether it is in their interest to fund employees to travel in their own time at the companies' expense.

Equally for many drivers, the tax on their private fuel will often be greater than the tax they pay on their company car.”

New tax policy

Since the late 1990s, the Government has gradually increased the scale charge paid by drivers who receive 'free' fuel for private use. 

More than a decade after the tax increases started to take effect, HM Revenue and Customs says that as many as 380,000 employees still pay tax on company-funded fuel for private use. 

In April 2003 the 'free' fuel tax system was changed to one based on a company car's carbon dioxide emissions multiplied by a set figure for the tax year.

Until April 6, 2008 that set figure was £14,400. It has now been increased to £16,900.

The Government has announced that from April 6 this year, the multiplier will increase at least by the rate of inflation each financial year. 

This tax strategy is designed to encourage drivers to give up the so-called benefit and travel fewer miles by paying for petrol and diesel themselves - while simultaneously supporting the Government's environmental strategy.

For the minority of drivers where ‘free’ fuel is no longer a benefit, a compensation package can be agreed. 

However, even if the drivers are shown to be retaining a 'benefit', the company might still decide that the cost to the company is too high.

Another issue the EST suggests companies consider is the perception of an employer who subsidisies private car travel.

“As fuel that is paid for by an organisation, even if it is used privately, is counted as part of that organisation's carbon footprint, they may decide that the idea of funding employees to travel privately may be counterproductive to meeting their corporate social responsibility targets, in which case a compensation package could be calculated which benefits the company, the individual and the environment," Mr Underdown said.

EST case study: Calculating the tax burden - the driver's perspective

An employee is a 40% taxpayer who has a five-door Ford Focus 2.0 Zetec as a company car.

The model returns 40 mpg on the combined fuel cycle, emits 169 g/km (21%) and they travel 10,000 private miles a year.

In 2008/9 the employee will pay £1,419.60 in tax for continuing to be in receipt of 'free' fuel (£16,900 x 21% = £3,549 x by 40%).

If they travel 10,000 miles a year, they will use 250 gallons of petrol. With petrol costing an average 89.5p a litre (£4.07 a gallon), according to the AA, it would cost the employee £1,017.50 a year at the pumps if they paid for the fuel out of their own pocket - a saving of £402.10 (private miles driven multiplied by the price per gallon and divided by MPG).

The company managing director drives a BMW 540i SE saloon, which emits 250 g/km of CO2 (35%) and returns 27 MPG. 

For continuing to receive 'free' fuel the MD will have a tax bill of £2,366 in 2008/9.

However, as they also travel 10,000 private miles a year, it would cost them £1,505.90 to buy the 370 gallons of fuel to travel that distance if they had paid for the fuel themselves. 

As a result, the MD would save £860.10 if they elected to give up the 'perk' and pay for fuel out of their own pocket.

The breakeven point for annual mileage arises when the tax on the fuel benefit equals the cost of the fuel (tax on the fuel benefit multiplied by MPG and divided by the price per gallon). 

In the case of the employee, they would have to travel 13,951 miles to breakeven if continuing to receive 'free' fuel, while the boss would have to travel 15,696 miles.

The current rules allow employees to opt out of 'free' fuel part way through the year and to calculate the liability pro-rata.
But drivers opting back into a 'free' fuel scheme during the same tax year will be subject to tax on the full tax liability for the year.

EST case study: The company's perspective

Just as drivers' should calculate whether they would be better off giving up 'free' fuel, so companies should also work out the cost to them of continuing to provide the 'benefit'. 

In the case of the employee the calculation is:

  • Cost of fuel £1,017.50
  • VAT recovery on fuel at 17.5% (£151.54)
  • VAT fuel scale charge £172.77
  • Class 1A NIC on fuel scale charge £454.27
  • Total £1,493.00
  • Corporation tax relief at 28% (£418.04)
  • Net cost to company of providing 'free' fuel £1,074.96


As the figures show, the cost to the company of providing 'free' fuel to the employee is £57.46 more than the value of the fuel. 

The same calculation for the MD would result in the cost to the company of providing 'free' fuel being £1,675.19 - almost £170 more than the price of the fuel at the pumps.