Expert Blog

Fleet Impact: The persistence of the diesel surcharge

This was meant to be a happier time. Throughout the last Parliament, George Osborne promised that the diesel surcharge would be gone by now. The 3 percent levy added on to the Benefit In Kind (BIK) rates of diesel cars was to be abolished at the beginning of this month.

But then the Chancellor changed his mind – abruptly and without any warning. In last year’s Autumn Statement, he announced that the diesel surcharge would remain for another five years. And so, fleets and employees with diesel company cars are still paying it this month. They’ll still be paying it in 2021.

No doubt Osborne is delighted with the extra £1.4 billion that his change of mind is expected to raise over the next half-decade. As for normal folk outside the Treasury, it’s left us dealing with costs that we didn’t expect, But, as the old song goes, que sera, sera. We now have to deal with the situation as it is.

What is the situation? Let’s use an example to clarify it. Consider an average diesel vehicle that emits 109 grams of CO2 per kilometre (gCO2/km), and has a list price of £25,000. Under the original structure proposed for 2016-17, that vehicle would have occupied an 18 per cent tax band, costing £150 a month in BIK and £51.75 in employer’s National Insurance Contributions (NIC). As it is, with the 3 per cent surcharge remaining, that vehicle actually occupies a 21 per cent band, costing £175 a month in BIK and £60.38 a month in employer’s NIC.

In other words, employers will be paying an extra £8.63 per vehicle per month in this financial year alone – or total of £31,050 over the next 12 months for a 300 car fleet. This could make non-diesels more attractive than they were before; whether they are hybrid or electric vehicles, or even just the new breed of cleaner petrol-engine cars.

Again, an example. Under the original structure, an Audi A4 2.0 TDI (diesel) 190 Sport Auto Saloon would have been in a lower 17 per cent band than its equivalent 2.0 TFSI (petrol) 190 Sport Auto Saloon. This would have made it cost less in BIK and NIC, thereby offsetting its higher list price.

But now, with the diesel surcharge in place, both vehicles are in the same 20 per cent band. And because the petrol model has a lower list price it actually works out cheaper in BIK and NIC. With a sweep of his pen, Osborne has changed the economics of the cars we choose to drive.

Thankfully, it’s not as bad is it could have been for diesels. There was some speculation ahead of the Chancellor’s latest Budget that he would try to satisfy the Supreme Court and start taxing cars according to their emissions of nitrogen oxides, which would penalise diesel cars far more than any of the alternatives. Instead, he chose to stick with the current carbon dioxide-based system, and confirmed that he intended do so even beyond 2020-21.

Yet the consequence of this is the diesel surcharge for another five years. Of course, fleet managers will still have to consider more than just BIK rates when it comes to choosing cars. What about fuel prices? What about fuel economy? For the time being, it is certainly worth giving greater consideration to whether petrol, hybrids and EVs should be added to the fleet mix.

Will we see diesel prices fall at the pump as demand for petrol resumes, and petrol prices rise? Will fuel economy of diesels continue to make it a winner for business, but drivers get some form of compensation from their employer?  What about the impact of low emission zones (LEZ) being introduced around the UK? Check back soon as we explore the potential impact of these changes to UK fleets.

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