I have a client in Switzerland whose company car fleet is quite large even by UK standards. The most popular car on the fleet is the Porsche Cayenne (the big four wheel drive).

It’s interesting that in the UK such a thing probably wouldn’t happen ­ and yet there are plenty of companies out there with high numbers of well-heeled employees who might aspire to such a car.

A large part of the reason is undoubtedly the decision taken by the government at the beginning of this century to base company car tax on the CO2 emissions of the cars.

With further changes, which came into effect from April 2008, the lowest tax charge is now 10% of the list price of the car and the highest 35% ­ so a canny employee can reduce their personal tax bill by 71% by choosing cars with the lowest CO2 emissions.

The result has been a clear switch by employees to lower emission, diesel engine cars. If you sit in a traffic jam on a British motorway, take a look around and you’ll be surrounded by mostly German four-cylinder diesels ­ the Audi A4, BMW 318 and 320d and Mercedes C200 and C220Ds.

If you consider that the new BMW 520D emits just 136g/km, you can see that cutting CO2 doesn’t necessarily mean downsizing.

What’s good for the goose is also good for the gander ­ savings in employee tax equate also to savings in NIC and in fuel ­ which will often be one of an employer’s most significant costs of operating a company car fleet. So, as the employees have cut their tax costs, employers have also seen relative savings.

Our own research suggests that a typical company car now emits less than 154g/km, while a typical private car acquired with the cash alternative emits 195g/km. And while the vast majority of company cars are new when acquired, 52% of cash allowance cars are second hand. Older cars often emit significantly more CO2.

This is one of the problems with the 2002 changes to company car tax ­ for many it meant switching to cars with lower emissions to save tax and NIC ­ which is great ­ but a lot of employees ‘took their ball home’, opting for cash and ignoring the financial stimulus to go green.

HM Revenue & Customs estimates that around 400,000 employees have opted out of company cars since 2002.

If all of these opted back in ­ assuming a typical average total mileage of 18,000 per annum and they shave just 26g/km off their average CO2 emissions ­ the UK would save total annual CO2 of around 300,000 metric tonnes ­ the equivalent to just over 1,700 Boeing 747 flights from London to New York.

Many employers see as much as 90%+ of their employees now opt to take the cash rather than the company car, where offered, and worry about the implications not just for their carbon footprint, but also for health & safety concerns.

Since 2002, the government has continued to change the tax system in the UK to encourage employers and employees to lower emission cars.

In April 2003 changes were made to the way that private fuel provided for a company car is taxed ­ also linking it to CO2.

In April 2008 a new lower band for company car tax and NIC was introduced for cars emitting 120g/km or less ­ 10% for petrol, 13% for diesel. This represents a 33% reduction in the tax charge for a petrol engine car and gives us the lowest company car tax charge in a generation.

And now in April 2009, further changes will be introduced which mean that the lease cost and tax relief for the employer will reflect CO2 as well. In effect this completes the set.

Under these new rules there are two CO2 hurdles for a car to get under ­ basically 110g/km or below is excellent and you get the big carrot, 160g/km and below is OK and above that is bad and you get the stick.

This is slightly confusing because (as has already been stated) the lower limit for company car tax and NIC remains 120g/km (at least for now).

The main impact of these changes will be on capital allowances. As many employers now lease their cars ­ and these new rules probably mean that more people will opt to lease ­ you might wonder why capital allowances are of concern as they only affect businesses that buy cars?

The answer is that the lessors will see their allowances change, which they will pass on in the rentals they charge lessees. So the impact will be felt through the cost of leasing a car.

The new rules mean that for 110g/km or less, the allowance will be 100% in the first year, as now. When the car is then sold, the proceeds will be deducted from the 20% writing down allowance pool.

For the middle group of cars (111-160 g/km of CO2) the cars will go into the 20% pool and be written down at 20% per year. The £3,000 cap is gone so relief will initially be accelerated for cars costing over £12,000.

For 161g/km and above, the expenditure goes into the 10% writing down pool, but again no £3,000 cap applies.

The big change is that, as the cars will all go into either the 20% or 10% pool, this means an end of balancing allowances and charges on cars.

So what does it all mean? More small capacity diesels? Fewer cars emitting more than 160g/km?

Almost certainly yes. In fact many employers are moving to ban cars that emit 161g/km or more from their company car choice lists, while others are asking employees to pay a higher contribution for cars that emit higher CO2. And yes, we may see further leakage to cash allowances where there is little concern paid to emissions, and where the employer is left to worry over the health and safety implications.

However there is something quite exciting happening ­ the combination of the new 10% and 13% tax rate for low emitters and these new rules for capital allowances are encouraging some employers to look at introducing the concept of salary sacrifice into company cars, potentially for all employees.

In the seven years that have passed since the 2002 changes to company car tax we have seen significant changes to our company cars. Today they have lower CO2 emissions than ever, but they are also less numerous with many more business journeys being undertaken in cars acquired, often second hand, with cash allowances.

However, changes in 2008 and now in 2009 may be about to make all the difference. Who knows, in another seven years the company car may once more be king.

Harvey Perkins is a director within KPMG’s company car team

Greener cars, lower costs

This long overdue reform of capital allowances will help the UK’s battered business and private car markets. Used car traders will welcome greener, less thirsty ex-fleet cars because they are what today’s highly cost-conscious secondhand buyer wants. That means better depreciation performance and more competitive lease rentals for a larger number of cars.

Many businesses are already aiming policy below the 160g/km threshold. A 140g/km diesel car should use 14% less fuel and will save its driver 21% in tax compared with a 159g/km diesel car. And in the very fuel and tax-efficient 120g/km category, Alphabet has seen orders rise from 2% of sales two years ago to 15% at the end of 2008.

New products for a reshaped market

With the reform of capital allowances, the move to align all company car tax to CO2 is almost complete. Suppliers are responding with new and improved products.

Mark Sinclair is director of Alphabet, a fleet funding company and part of the BMW Group

Emission possible

Under new rules for tax rates for low emitters, and capital allowances, the employee sacrifices gross pay and receives instead a company car from the 120 g/km or below group. Overall savings are exciting – the tax and NIC on the car is a fraction of that charged on the salary foregone. If the car emits under 110 g/km there are enhanced Capital Allowances – equating to an even lower rental. And in the current climate, deals are there to be done with manufacturers to even further lower the cost – and therefore the amount of the sacrifice. See below for a worked example.

Honda Civic MA

As a private car
Annual net vehicle cost (Rental & maintenance): £3,525
Annual insurance: £600
Employee’s annual cost of leasing car privately: £4,125

As a company car with salary sacrifice
NET salary sacrifice @ 20 %: £2,781
Tax at 20% on company car benefit: £311
Employee’s net annual cost of taking option: £3,092

Annual saving to employee : £1,033

Employer position
Gross salary sacrifice from employee: £4,030
Plus employers NIC: £516
Total: £4,546

Less rental & maintenance for the car: £3,231
Less insurance: £600
Less class 1A Nic on company car benefit : £199

Employer costs: £4,030

Annual employer savings: £516