Too many people with company cars in the Midlands remain confused over the tax effects, it was claimed today.

And many companies are unaware of the potential benefits to their profits of providing low emission cars to their employees.

Mark Ashworth, of accountants Kendall Wadley, said: "There is massive confusion amongst people given a company car as part of their salary packages.

"Is it something that makes good sense financially or not? And how can they make it become a real benefit rather than a perceived one, that in reality, costs them a lot of money through their tax code?

"It is a very important question, but because it looks a complex problem, too many people are ignoring it and assuming their company car is a real benefit to them."

A company car is a taxable benefit and the amount you pay is shown on your PAYE tax coding notice. Tax is calculated depending on the carbon dioxide emissions levels produced by the car. The business miles covered by the car and the age of the car are now irrelevant in the tax calculation.

Tax is calculated as a percentage of the price of the car.

The minimum charge is 15 per cent and there is a maximum of 35 per cent. The level of CO2 emissions qualifying for the former is 140 g/km and this is in place for tax years

2005/06, 2006/07 and 2007/08. It is expected this will tighten up after that.

Can you pay tax on less than 15 per cent of the original price of the car?

According to Mr Ashworth, yes you can - if you adopt a very eco-friendly approach to your driving.

He said: "Alternative fuels to petrol and diesel will help. If you drive an electric powered car you get a further six per cent discount, so you will pay tax on just nine per cent of the cost of the car.

"For a hybrid electric and petrol car - like the Toyota Prius for example - you will get a two per cent discount plus a further one per cent for every 20g/km of CO2 the car emits under 140g/km. So for the Prius, as it produces emissions 26g/km below 140g/km it qualifies for a further one per cent discount - three per cent in all - so tax is calculated on 12 per cent of the cost price of the car."

But what benefits are there to employers who provide their employees with low emission cars?

Expenditure on a new car until March 31, 2008 qualifies for a 100 per cent First Year Capital Allowance providing the car in question was regis-tered after April 16, 2002 and that CO2 emissions are no more than 120g/km or the car is electrically powered.

The main examples of cars with CO2 emissions under 120g/km include the Audi A2 1.4 TDi, the Citroen C2 1.4 HDi, Ford Fiesta or Fusion 1.4 TDCi, Honda Civic IMA, Peugeot 206 1.4Hdi, Renault Clio 1.5 dCi, Smart ForTwo, Toyota Yaris T3 1.4 and T Spirit 1.4 D, Vauxhall Coirsa 1.0 12v Life ECO and the VW Lupo 1.7 SDi or 1.4 TDi PD Sport.

These may not be the most attractive to have as a company car at first glance.

But maybe it would be more tax efficient to provide company cars for your wife or your children, rather than yourself? Within a family owned or owner managed business, providing such a car for family use could be very tax-efficient.

As an example, if a mother or father runs a small business and decides to provide a car for each of their children, and he or she is a 40 per cent tax payer, providing, for example, a Smart For Two for each child, the position is quite attractive.

The income tax payable by the parent on each car is the list price of the car - £6,578, at 15 per cent which is £986 for each car. The parent pays tax at 40 per cent on that figure so £395 per car per year.

The company however can claim 100 per cent first year capital allowance on the expenditure on £6,578 for each car at 19 per cent - that's £1,250. It saves Class 1A national insurance on £986 at 12.8 per cent - a further £126 per annum. It can make a full VAT reclaim on input tax on car servicing and other services, and gain corporation relief on the running costs of the cars.