Government plans to give gay couples equal rights to employment benefits may lead some companies to drop health insurance and company cars for their staff.

Deputy director general Tony Baker says many firms are already eliminating these employee fringe benefits partly because of the rising cost of insurance.

Both motor and health insurance premiums have far outstripped inflation in the past year. Moves to widen the employment benefit net to include gay couples are likely to exacerbate the trend of firms cutting back on fringe perks, says Baker.

"The whole area of fringe benefits is seeing a change," Baker said. "Companies will start to question the value of fringe benefits once it becomes a hassle in terms of administration and extra costs.

"Male drivers tend to be worse than female drivers. They would probably present a higher risk. It might just tip the balance for some companies."

The Equal Opportunities Commission is now drawing up a code of practice on how firms should treat homosexual couples. If this is not adhered to the government is likely to enforce statutory rights and the EU is set to make sure company insurance policies cover gay couples.

It follows the European Commission's recent proposals to stop such discrimination, after the case two years ago when South West Trains employee Lisa Grant took her employers to the European Court of Justice. South West Trains refused to offer travel concessions to Ms Grant's cohabiting girlfriend. The case was lost.

Gay couples could therefore soon receive private health care, company car insurance and relocation allowances. Pensions are not included.

Many leading insurers are already geared to offering policies for gay couples. PPP health insurers have recognised same sex couples since early 1997.

BUPA spokesman Adam Lewis, said it similarly would cover whichever employees a company wanted insured. Mr Lewis said it was up to the company taking out the policies to decide exactly how they defined a couple.

Norwich Union Healthcare spokeswoman, Louise Zucchi, voiced a similar approach. Zucchi said: "We do not discriminate in that way."

CGU used to have a dual driver policy initially aimed at married couples. But the policy brief was then broadened to include cohabiting couples and then gay couples.

Spokesman Ian Frater said CGU operated an "open driving" policy for its car fleets. It was up to companies taking out insurance to decide who could drive and who was regarded as part of a couple.

Frater added: "We do not have any problem with this. We are prepared to offer cover to anyone."