Car allowance or company car? It's a choice faced by many organisations, especially those whose employees regularly travel. To help you choose the right option for your business, we've put together this helpful guide to steer you in the right direction.
A car allowance covers any work-related costs when an employee uses their vehicle for their job. A person may receive a car allowance after a promotion, so in this example, it's a reward for employee loyalty.
However, a car allowance is necessary in some instances, as employees would incur unfair additional costs, such as travelling salespeople or some mobile healthcare professionals.
Examples of car allowance expenses include fuel, some maintenance, and a lease.
When an employee has a car allowance they receive a lump sum of money added to their salary to cover work-related driving expenses, such as fuel or even a lease. Car allowance is usually paid on a monthly basis and is included in their payslip.
Company car:
Car allowance:
Company car:
Car allowance:
Yes, because it's an employee benefit. The amount of tax an employee pays is determined by their income tax band. The basic rate is 20% and the higher rate is 40%.
For car allowance to be a meaningful benefit you must keep in mind how much money employees can access after tax has been deducted.
A company car or car allowance can form part of your employee benefits package.
Possibility for branding cars, especially for salespeople
Great incentive to attract top talent
Control over the choice of vehicle
Easy to control costs
Responsible for repairs, servicing, and driving costs
Liability for vehicle insurance
Responsible for selling vehicle
Not always the most efficient for tax purposes
Requires a significant upfront investment
Due to the increased cost of living, employees are focusing more on benefits and perks in addition to salary, so it's important to check that your offerings are still current. You can do this by reviewing your employee benefits provider. During this time, it's also a good idea to confirm if your car benefits are still meeting your employees' needs. For example, if your allowance covers PCP.
By allowing employees to select a new car with PCP, they are more likely to get the car at a competitive rate. PCPs also offer increased flexibility as the scheme only covers the vehicle's depreciation throughout the agreement rather than its full value. When the customer reaches the end of their agreement, they can either hand the keys back, buy the vehicle, or begin a new PCP.
Employers with a fleet of cars can offer their people a cheaper option when considering tax savings and salary sacrifice schemes compared with straight-up monetary repayments and any initial upfront costs.
Suppose a cash alternative is made readily available to employees. In that case, a new HMRC tax regulation will be triggered, meaning employees will be taxed on higher Benefits in Kind (BiK) on the cash allowance. There will also likely be implications for NI payments for the employer too.
Another factor is branding. Image and operating cost decisions play a huge part in the selection process. This often restricts certain makes, models, and body types, such as convertibles, or, for environmental reasons, certain emission brackets and fuel types.
However, cash allowances depend on the employee directly sourcing their vehicle from a dealership or website, which can be time-consuming. To avoid such complications, management should be mindful of this when considering a cash allowance — especially in smaller teams. As the rates of BiK tax change every tax year, employers must be vigilant or risk reimbursement costs to their employees.
Every year, three key factors are used to calculate how much tax an employee will have to pay towards their annual BiK tax.
For example, a person earning a high salary with an expensive high-emission car will pay more BiK tax.
With a unified fleet of cars, however, a company can easily calculate overall fuel costs and required mileage and dedicate resources accordingly.
Cash allowances for company cars are typically added to the employee’s monthly salary, which means they're subject to normal income tax. Consequently, employees will need to calculate how their take-home pay is affected.
In the case of company-provided cars, the business takes care of the administration and maintenance. The opposite is true for car allowances, as the employee receives a sum of money to buy a car and maintain it themselves.
Many factors can influence whether an employee should receive a car allowance or a company car.
Company car:
Car allowance:
Company cars:
Car allowance:
Company car:
Car allowance:
Company car:
Company car:
Car allowance:
Company car:
Car allowance:
This is entirely up to your employer and their scheme. Some companies offer bigger allowances than others and there are many factors that influence this. The most obvious is expected business mileage, but other factors include employee seniority and regional repair costs.
Car allowance vs. company car? What is right for one company may not be for another.
For organisations whose staff have to drive as part of their jobs, a fleet of company cars can be more efficient, depending on the size of the organisation.
That said, employees may find a car allowance a more practical solution if they don't want a separate company car.
Regardless of the approach you decide to take, always research your options carefully.
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