Company Fuel Tax Explained

Company cars are a great incentive offered by many employers, with some companies providing luxury car leasing to their employees and the fuel they need for everyday usage. However, employees need to be extra cautious as this isn't just free fuel. You can be taxed if the employer provides any free fuel. This is due to the fact that the UK government recoups this allowance through the business car fuel benefit since it considers it to be a taxable advantage.

To help you understand the rules regarding company fuel tax, car leasing experts, Nationwide Vehicle Contracts, explain exactly what the company car fuel benefit is, who has to pay it and provide guidance to help you decide whether it's a benefit for you.

This guide covers the following:

Company fuel tax, also known as fuel benefit, is a tax for employees who have a company car and free fuel for private use. ‘Private use’ includes employees’ journeys between home and work, unless they’re travelling to a temporary place of work. A company car fuel benefit is a tax charged to you for using the fuel paid for by your employer, as HMRC considers it as free fuel.

Therefore, it will still cost you to receive the fuel as this tax still needs to be paid. You will be taxed accordingly if your employer does not subsidise this benefit.

If your employee does not pay the employer back for the fuel they use privately during the tax year, they will need to pay tax on its value. 

You can work out how much company car fuel tax you will need to pay by using HRMC's advisory fuel rates, which, from 1 December 2022, are as follows: 

Petrol advisory fuel rates

Diesel advisory fuel rates

Electric advisory fuel rates

LPG advisory fuel rates

Please note: Hybrid cars are treated as either petrol or diesel cars for advisory fuel rates.

Company fuel tax applies when the company pays for any fuel used in a company vehicle on personal journeys. Unless the driver has kept thorough documents to demonstrate otherwise, HMRC may conclude that the motorist is using their car for private use. For instance, if a company fuel card was used for 15,000 business miles and 5,000 personal miles, the driver must be able to produce records that show the 15,000 miles worth of business trips. They must also have full proof that they have reimbursed their employer for the 5,000 private miles and the VAT on the fuel costs.

If the fuel benefit is terminated or started halfway through the tax year, it may be prorated.

According to GOV.UK, employees may be excluded in specific circumstances if they use the fuel in one of the following ways:

Cars used for business purposes only

Any journey an employee makes as part of their job duties can be considered a business purposes journey, for example, a salesperson travelling to visit a customer. An employee's commute to a temporary workplace is also taken into consideration. You must instruct your employee not to use the vehicle for personal travel and ensure that they don't in order to qualify for an exemption.

Cars used for employees with a disability

Cars modified for disabled employees may be excluded if they are only used privately for trips between the employee's home and place of employment or when the employee is going to work-related training.

When the employees pay their own fuel

Employees do not have to declare or pay a fuel tax if they purchase their own diesel or petrol or reimburse the employer for the fuel they consumed during the tax year.

Pool cars

You don't pay fuel tax on Pool cars, which are shared company vehicles stored on the grounds and exclusively utilised for business purposes. However, you will be charged if a pool car is used for personal use or is shared by employees and is not a pool car.

Cars provided to close relatives

You do not have to pay anything if you're an individual employer (e.g. sole trader) or if you offer the vehicle to someone who works in your business, but only as they are a close family, not because they are an employee of your company (e.g. you give your child a car as a gift). Included in the definition of a close relative are your spouse, civil partner, parents, and any additional dependents or home guests.

So, if there are not any of the above cases and the employees do not pay back for the fuel that they use privately during the tax year then the employer has to take the following actions:

• Report on form P11D
• Pay class 1A National Insurance on the value of the fuel benefit

For this reason, it is really important that the employers keep records of all their employee’s expenses and benefits.

To calculate how much fuel tax you'll have to pay, you need to calculate the vehicle's benefit in kind with a fuel charge multiplier. The fuel benefit is fixed yearly and is controlled by HMRC. So, for example, for the year 2021/22, the fuel benefit charge multiplier is £24,600 and will rise to 25,300 in 2022/23.

The benefit in kind or BIK tax is calculated by your car's CO2 emission band and multiply it by the fuel benefit charge multiplier. For example, 26% x £24,600 = £6,396. Then multiply this amount by your marginal rate of Tax. For example, 40% x £6,396 = £2558.40 is the amount that you will have to pay.

To learn more about BIK tax, check out our Company Car Tax Explained guide and our Company Car Tax Rates 2022 guide.

If you use a fuel card for business purposes, you don't have to pay tax on a fuel card, as business purposes are not classed as a taxable benefit. However, you will be taxed if you use a fuel card to cover the fuel for personal travel. This is because the company is subject to tax charges, and the business must pay National Insurance tax on the value of the fuel used for personal use.

With a company car, you can claim back the mileage you're doing but not the tax. Approved Mileage Allowance Payments (AMAP) allow you to cover the cost of your fuel, your Vehicle Excise Duty (VED) and the upkeep of your company car. However, you can't use the AMAP rates to claim back tax as those rates are supposed to cover more than just your fuel costs.

If you want to know more about business car leasing, check out our dedicated advice on car tax bands 2022/23, and the latest car lease deals or call Nationwide Vehicle Contracts on 0345 811 9595 to speak to one of our car leasing experts.