From January 2006, UK employees choosing new diesel-powered company cars that comply with the Euro IV emissions standards will no longer be exempted from a 3% Benefit-in-Kind (BIK) tax surcharge. Although this will increase the tax burden of most company car drivers opting for diesel, Glass's Market Intelligence Service predicts that that there will be minimal impact on the continued upward growth in diesel registrations, or on the residual values of diesel cars.

"The introduction of the BIK surcharge in 2002 had the effect of switching drivers to Euro IV-compliant cars with lower emission levels, not because they wanted to display their green credentials, but because they wanted to save money," said Alan Cole, Glass's editorial consultant. "It could be argued, therefore, that when the 3% benefit for Euro IV diesels is removed, so too will be some of the incentive to choose a diesel."

However, in practice there is unlikely to be any noticeable shift in demand away from diesel. "Taking into account typical 36-month fleet replacement cycles, the bulk of those drivers due to replace their diesel company car in 2006 are likely to be well used to paying the 3% surcharge because their existing car will not have been Euro IV-compliant," noted Cole.

"If diesel offered a preferable alternative to petrol at the time they chose their existing company car then this will still hold true after the January 2006 deadline, making them just as likely to opt for diesel again."

Awareness of the BIK changes is not high, and even those that are anticipating higher tax contributions may nonetheless still prefer diesel power for its economy and driving dynamics.

"During the last five years, the diesel share of the new car market has climbed steadily and the trend is clearly still pointing in a very positive direction with no sign of peaking, regardless of these new BIK changes," Cole said.

Glass's is predicting a small uplift in Euro IV diesel car registrations in advance of the January 2006 deadline, but this is unlikely to affect residual values.

"The additional volumes will not be sufficient to upset the current balance of supply and demand in the retail used car market," Cole added.