COMPANY car drivers are being urged to switch to greener models, or accept cash from their employer and lease their own car, following Alistair Darling’s “green” budget.

While the chancellor’s big hikes in vehicle excise duty grabbed the headlines, he also clobbered workers with company cars who are taxed on the benefit. They face paying hundreds of pounds a year more from 2010.

Meanwhile, family car drivers could find their road tax, or vehicle excise duty (VED), more than doubles in the next two years.

Nine in 10 cars will be affected by higher rates under the new tax regime, according to analysis by the Taxpayers Alliance (TPA).

Rose-tinted specs fail to offer hope

The obvious justification for Mr Darling’s relatively upbeat scenario is that the outlook is fraught with uncertainty

Background

• Darling's first Budget: the main points

• The Chancellor's speech in full

• Darlings first Budget: the reaction

• Chancellor hits the home budget as his debts soar

• Need to know: Budget 2008

The Chancellor delivers a modest Budget

As so often is the case, virtue, in terms of improving public finances, is not now, but at least a year away

Multimedia

• Video sketch: Matthew Parris and Ann Treneman

• Eco-worrier: should we be pleased?

• Green Central: round-up of the green Budget measures

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The Vauxhall Astra MY2007 2.0i and the SAAB 9-3 MY2008, for example, are classed in Band F for the 2008-9 tax year and pay £210 in tax. By 2010-11, however, the rate will be £430 a year – an increase of more than 100%.

Here we answer your questions on how road tax and company car tax will be calculated.

COMPANY CARS

How will company car tax change?

The tax is determined using the list price of the car multiplied by a percentage based on how polluting it is. The current range is between 15% for cars emitting 140g or less CO2 per kilometre and 35% for cars with a CO2 rating above 240g/km.

A company car driver with a Citroën C3 Pluriel Open costing £14,000 and producing 135g/km of CO2, will have a taxable benefit of £2,100. For a higher-rate taxpayer, this would mean a tax bill of £840.

From 2010, the 15% rate will apply to cars with 130g/km of CO2, down from 140g. Cars producing more than this will pay 1% more for each 5g/km up to 230g/km. For the Citroën driver above, this will mean an annual tax increase of £56.

What about fuel tax?

The increased rates also apply to fuel benefits, where employers provide free fuel and workers pay tax on the benefit. Fuel charges are determined using a fixed price multiplied by the same percentage as with the car’s CO2 levels. This fixed rate will go up in April from £14,400 to £16,900.

For the Citroën, the tax on the fuel benefit will increase by £218 in April. Once you factor in the higher company car tax, the total increase in tax for a higher-rate taxpayer will be £274 by 2010.

Someone driving a slightly more polluting car, such as the Toyota Avensis saloon diesel costing £20,400 and with a 146g/km of CO2 output, currently pays £1,550 as a higher-rate taxpayer. This will go up to £1,714 by the 2010 tax year – an increase of £164.

The fuel benefit for the Toyota will increase from £1,094 today to £1,420 by 2010-11, up £326 – a total of £490.

Not all company car drivers go for the free petrol because of the high tax costs. You can work out how many miles you need to drive to make it worthwhile by multiplying the fuel tax you would pay by the miles per gallon of your vehicle and then dividing this by the price of petrol per gallon.

With the Toyota Avensis, you would need to drive about 12,000 miles a year to benefit from paying fuel tax.

Can I get a discount?

Diesel car drivers have to add an extra 3% when calculating their car and fuel tax. Hybrid cars such as the Toyota Prius, however, enjoy a 3% discount on the minimum 15% rate. Cars using alternative, greener fuels, such as LPG and biofuels, also get a 2% discount.

From April, there will be new lower bands. Electric cars such as the G-Wizz will benefit from a special flat 9% rate.

A new 10% rate will also be introduced in April for cars emitting less than 120g, which will benefit drivers of cars such as the one-litre Peugeot 107.

If we take its list price of £7,600, a higher-rate taxpayer would have to pay £304 rather than the £456 they will pay today.

Should I go for cash?

Most firms offering a company car will also offer a cash alternative, though this is not necessarily a cheaper option. A general rule of thumb is that the more fuel-efficient the car, the cheaper it will be to opt for the vehicle.

Analysis by Price Waterhouse Coopers shows a firm could offer cash of £4,768 instead of a leasing a Toyota Prius for three years from the 2008-9 tax year. This would amount to a net allowance of £2,813 and a further £660 from not paying company car tax – a total benefit of £3,473.

However, to lease the car yourself it would cost £5,628 if you include maintenance and insurance, leaving a £2,155 shortfall.

YOUR OWN CAR

How will road tax work?

The 2008-9 tax system divides cars into seven categories ranging from band A to G based on how polluting the vehicle is. The most polluting cars pay up to £400 a year while the least polluting vehicles pay nothing.

However, by the 2009-10 tax year, cars will be divided into 13 categories with a new top band to cover vehicles with more than 255g/km of CO2 rather than the current top tier of 226g/km. The top tier cars will pay £440 a year next year and £455 by 2010-11.

The new tax regime will also see the introduction of a “showroom” tax for new cars which will range from £115 to £950 for the most polluting vehicles such as Jaguars and Range Rovers.

Those in the next band down will pay £750. This includes family cars such as Vauxhall Vectras, Mercedes M and E class estates, and Mitsubishi Shoguns.

What cars can I buy to beat the system?

There are only two cars on the market which fall into the lowest category and so pay no VED. These are the Ibiza 1.4 TDI 80PS Ecomotion and the Volkswagen 1.4 TDI.

There are still some large family cars which are subject to lower tax. The Skoda Fabia Estate for example, which costs about £13,000, is currently in the second lowest band with a £35 VED rate. In the 2009-10 tax year, the rate will go down to £30. By 2010-11 you would pay no tax for the first year if you bought it new and then pay £35 a year thereafter.

Another surprising low carbon emitter is the BMW 3 Series diesel saloon, which has a rate of 123g/km. It is currently classified as a band C car with an annual charge of just £145.

By the 2009 tax year however, it will have a charge of only £90 and no showroom tax in the first year.

What about secondhand cars?

The new tax rates only affect cars made after 2001, raising fears that the value of second hand cars made after that date will decrease.

Pre-2001 cars will pay a flat £200 fee rising with inflation. It means you can own a high polluting car that is eight years old and pay less than half the tax of a new top-band car.

Analysts Eurotaxglass said the value of post2001 used cars will fall by an additional 8% this year.

Matthew Elliott, chief executive of the Taxpayers Alliance said: “There is a serious danger that this will push people into using old cars that are even less efficient than 2008 models. The Treasury simply hasn’t thought the measure through, and it could have really counter-productive consequences in terms of CO2 emissions.”

ROAD TAX UP £70, BUT STILL BETTER OFF

MIKE Taylor, 33, from Sleaford, Lincolnshire, is a manager at a waste firm.

He has a Nissan Qashqai 1.5L diesel with a CO2 rating of 139g/km. The list price is £17,400. As a higher rate taxpayer, he pays £1,044 tax for the company car.

The tax goes up £70 in 2008-09 and £139 in 2010.

The increase in car tax will be offset by a reduction in his tax and national insurance contributions.

These will go down by £292 in April. A £497 increase in Nics will be offset by a £789 fall in his income tax.

He will be £222 better off next month.

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