Perk runs out of fuel?

Higher taxation could turn your company car from a benefit into a liability. John Andrew puts you back in the right lane

The company car is viewed with envy by those who have to buy, insure, tax and maintain their own set of wheels. But increasing numbers of those who already have company cars are beginning to shun the perk and take monthly cash payments instead.

The main reason is tax, in particular the fear that it couldincrease in the future.

Employees who are provided with a company car and who then put it to private use have what the Inland Revenue terms a "benefit in kind".

Any employee who has a total reimbursement package of pounds 8,500 or more a year, and every company director, pays income tax for the privilege of having a company car for private use.

Reimbursement includes wages or salary, payments for business expenses and the value of any benefits in kind, such as medical insurance, subsidised loans and, of course, the car.

Since most employees with company cars enjoy reimbursement packages worth pounds 8,500 or more a year, few escape the tax. Motorcycles, invalid carriages and vans or other commercial vehicles are not classed as "company cars".

Company cars are taxed according to the number of business miles taken in a year, the age of the car and, most importantly, the actual list price of the car on the day before the date of its registration.

The benefit in kind is calculated each year as 35 per cent of the "price" of the car, less reductions for business miles covered and for older cars.

The price is usually the list price plus taxes (excluding road tax), delivery charges and the list prices of any accessories. It is subject to a cap of pounds 80,000 and special rules apply to "classic cars" or those without list prices. The benefit may be reduced by one third if business mileage comes to between 2,500 and 17,999 miles and by two thirds if 18,000 or more business miles have been clocked up within the tax year.

The benefit is also reduced by one third after reductions for business mileage for cars that are four or more years old at the end of the tax year.

Income tax is levied on the benefit in kind and is collected through the PAYE system.

Employees can usually choose any make or model of car within a certain price band. Those who wish to upgrade their vehicle can usually do so by making a contribution towards its cost. In this situation the Revenue will reduce the "price" of the car when calculating the benefit, subject to a maximum "own contribution" of pounds 5,000.

Employees who have to pay their employer for using the vehicle for private purposes have the amount of tax they pay reduced pound for pound.

The beauty of a company car is that road tax, insurance, maintenance and repairs are paid for by the employer. It is for this reason that Catherine, a communications officer in the City, has chosen the company car route.

"Until recently, we ran two cars. James, my partner, had his own Mercedes and I had a company car - a Mazda. We did quite a high mileage on the Mercedes, but I hardly used the Mazda.

"While ordinary servicing is reasonable, the cost of putting something right can be quite horrendous," she says.

"It was when we had a pounds 900 bill for repairing the sunroof on the Mercedes that we decided that when the Mazda was due for replacement we would have just one car and it would be my company car, a Mercedes.

"Despite the fact that I have a hefty tax bill, we at least know we will not have any surprise garage bills."

Paul, an accountant for a firm of London solicitors, has also decided to stick with his company car, but he has an opt-out for the future.

"At the moment, it is just worth my while," he explains. "However, should Labour win the next election, the tax could increase. If this happens, I shall buy the car from the firm and have the perk replaced with a cash alternative."

Meanwhile, Mike, a compliance officer for a bank, has already opted out of his employer's car scheme.

"Until June I had a seven-year-old 1800cc Mercedes. Usually, the bank would only allow me to keep a car for four years but, as I did a low mileage and the vehicle had been trouble-free, an exception was made. Each year, I did just over 2,500 business miles so, together with the allowance for an old car, I paid pounds l00 a month in tax.

"When the bank pressed me to change," he continues, "I decided to take a monthly cash alternative instead. The new Mercedes I wanted cost pounds 24,291. Because it was likely that in future I would be doing less than 2,500 business miles a year, my tax bill would rise to pounds 283 a month.

"As I could lease-purchase the car for a 10 per cent deposit and payments of pounds 356 a month, I decided this was the better course as I feel sure company cars will be taxed at even higher rates in the future."

A company car is a good perk, but whether this will always be the case depends on future taxation.

Employees who have the option of a cash alternative could well find that there is not a great deal of financial difference between taking the cash and acquiring a car by lease purchase, even though they will have to pay road tax and insurance themselves.

While they can protect themselves against any surprise garage bills with a monthly maintenance package, employees with company cars cannot protect themselves against future tax changes.