Company car tax explained - Fuel, tax and the environment: the facts

It isn't only your company car that gets taxed, but also the fuel that goes in it.

Below, we outline the options available and costs of running them.

Unleaded petrol
Britain's most popular car fuel sells for around 95p a litre, with around half that cost going to the Treasury as tax.

Petrol is less efficient than diesel, increasing carbon dioxide emissions and punishing you on company car tax and your annual VED tax disc cost.

Many petrol engines struggle to meet the lowest company car tax band of 140g/km - a hurdle many small diesels will clear. As a result, diesel sales are soaring.

However, there are some superminis which qualify for the lowers tax rating - the VW Polo Bluemotion, 1.0-litre versions of the Citroen C1/Peugeot 107/Toyota Aygo and Daihatsu Charade all emit less than 140g/km.

Diesel
Diesel is more efficient than petrol, and diesel currently retails for around 96p per litre.

This makes it the fuel of choice for many company car drivers, although diesels attract a 3% tax surcharge because of higher levels of pollutants other than carbon dioxide.

Improved particulate filters are cleaning up the emissions from diesel engines, and in the long term they could be given tax parity with petrols.

Biofuels
Biofuels are made up of a mixture of petrol and alcohol derived from cereal crops.

It is claimed they can lower carbon dioxide emissions by up to 70%, although they are often described as carbon neutral, because the plants used to create the fuel absorbed carbon dioxide from the atmosphere while they were growing.

However, the fuel is not widely on sale in the UK, with only the Morrisons supermarket chain distributing it. It typically costs only about 2p a litre less than conventional petrol.

There is also controversy because the vast acreage of land required to grow the fuel-bearing plants is said to be responsible for deforestation.

Also, as farmers switch to growing profitable biofuel-producing crops, there are real concerns it will create a shortage of food, driving up prices.

LPG/CNG
Liquefied petroleum gas (LPG) and compressed natural gas (CNG) cost around 45p a litre, but are hard to get hold of at forecourt garages.

Most gas-powered cars are dual-fuel, running on LPG and petrol, and they are generally one-third less efficient than a pure gas-powered car.

Dual-fuel cars that were first registered on January 1, 2000 have two carbon dioxide emission figures (one each for petrol and gas) and attract a 2% tax deduction.

Those registered after that date do not get a tax reduction.

Gas only
Pure gas-powered cars currently attract a company car tax rate 2% lower than petrol, and they are exempt from the London congestion charge.

However, the popularity of gas-powered cars is waning, because theircarbon dioxide emissions are still significant.

Electric hybrid
Hybrids have caught the headlines in recent years, but the sustainability of running a car powered by a conventional engine backed up by a bank of batteries and an electric motor is uncertain.

Cars such as the Toyota Prius or Honda Civic IMA cost around £2000 more than an equivalent petrol car to buy, but do benefit from a 3% reduction in company car tax, VED tax disc savings and congestion charge exemption.

Hybrid technology is considered a stepping-stone until hydrogen power becomes available.

Electric
Electric cars such as the G-Wiz, Nice Mega City, Micro Vett Idea, Sakura Maranello4 and Elettrica can be recharged in six hours and attract a 6% reduction in company car tax, lower VED car tax rates and are exempt from congestion charges.

On the negative side, their range is limited and using power created by fossil fuel-guzzling power stations to recharge them limits their greenness.

Questions have also been raised about the crash-test safety rating of the G-Wiz

Hydrogen
Hydrogen fuel cells produce only one emission - water. As a result, car makers and governments are eager to see them introduced, although they are unlikely to be mass produced before the end of the decade.

When they do arrive, expect massive tax breaks in order to boost take-up of the new technology.

You can watch a What Car? video on Honda's hydrogen-powered FCX, which cost £5 million to develop, here