For many employees, having a car allowance or company car is the stuff of dreams. That's probably why companies that offer them leave their competition by the wayside. But at what cost? And what other options do you have as an employer? Here's a guide to implementing a company car allowance policy.
A car allowance covers any work-related costs when an employee is using their own vehicle for their job. In some industries, a car allowance is the norm, but in others, it is a reward for employee loyalty.
Examples of expenses car allowance covers 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.
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.
Are you going to offer your employees car allowance or are you looking into providing a company car? We've created a quick overview for employers to see what their options are as they add vehicles to their employee benefits package.
Possibility for branding cars, especially for sales representatives
Great incentive to attract top talent
You have control over the choice of vehicle
Easy to control the costs
You’re responsible for repairs, servicing and driving costs
You’re liable for vehicle insurance
You’re responsible for selling the car in the end or when the employee leaves
It could be inefficient regarding taxes for both parties
A company car scheme requires a significant investment upfront
One obvious factor that compels employees today is the freedom of choice, which can also vary according to your employee benefits provider. The automobile industry is thriving with technological advancements at its helm. For an employee who uses their vehicle as an extension of their office, it's no longer simply a means of getting from point A to B. The increasing practicality provided by added mod cons such as sat nav, Bluetooth, hands-free calling and parking sensors are paramount.
By allowing employees to select a new car, with PCP there's a greater chance that they can select their vehicle at a competitive rate. PCPs also offer increased flexibility. Since the scheme only covers the depreciation of the vehicle over the duration of an agreement, rather than its full value, monthly payment plans can be brought down, which provides greater freedom based on their financial restraints. When the customer reaches the end of their agreement, they can choose to either hand the keys back, buy the vehicle or begin a new PCP.
When a company has its own maintained, insured and serviced fleet, the drivers, of course, have more security. Employers in possession of a fleet of cars can provide their people a cheaper option, when taking into account tax savings and salary sacrifices schemes in comparison to straight-up monetary repayments, and any initial upfront costs.
If a cash alternative is made readily available to employees, new HMRC tax regulation will likely be triggered, meaning employees will be taxed on higher Benefits in Kind (BiK) or the cash allowance. Alongside the employee’s higher tax liability, those offered cash allowances will lose the incentive to choose low emitting vehicles, since the tax benefit will be eroded.
Additionally, the employer will also be subjected to higher National Insurance contributions on any vehicles that were previously valued as a low BiK, making the process more complex and convoluted for new and existing employees based on their different demands and needs.
Another factor is branding. Part of the attraction to corporate car fleets is the uniformity with which they portray the company. Decisions relating to image and the operating cost 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 running into such complications, management should be mindful of this when considering the option to offer a cash allowance — especially in smaller teams. As the rates of BiK tax change every tax year, employers must remain savvy or risk forking out reimbursement costs to their employees.
Every year the question of how much tax an employee will have to pay towards their annual BiK tax is calculated using three key factors.
Here's how it works: a person earning a lot of money in possession of an expensive car that emits high levels of CO2 will, quite rightly, pay through the nose in BiK tax. Reverse those three factors and they'll pay less.
With a unified fleet of pre-chosen cars, on the other hand, a company can easily figure out overall fuel costs and required mileages and dedicate resources accordingly. This cuts out the trouble of having to adjust an employee’s salary to meet their automobile tastes and habits.
However, with the growing focus on electric cars and surcharge of 4% on diesel cars, there's much debate about how the Vehicle Excise Duty (VED) will be affected. This is a basic amount payable on all cars, based on their CO2 emissions, regardless of whether they're for personal or business use.
Added to this, employers can find themselves caught up in the debate over whether or not to shift to an electric run fleet in the interim, and forking out for additional costs.
Cash allowances for company cars are typically added onto the employee’s monthly salary, which means it's subject to normal income tax. Employees will therefore need to calculate how this affects their take-home as tax bands come into play.
In the case of company-provided cars, the administration and maintenance are cared for by the business, leaving less choice for an employee but also less hassle. In contrast, cash allowances’ administration and maintenance costs are passed onto the driver. This gives further freedom in choosing a motor but also less guidance towards the overall upkeep.
Such decisions should not be taken lightly. This guide explains the considerations you should take when researching the best decisions for you.
Is car allowance taxable? For people who are curious about tax implications in the UK and want to cut back on how much car tax they're paying, there are several things to keep in mind. Making the switch to an electric car or want to know more about what making specific changes to your car means for how much taxes you pay?
There are many factors that separate company cars from a car allowance, and what is right for one workforce may not be right for another.
When it comes to financial control of a company car:
Financial control when you offer a car allowance:
The ownership of company cars:
But when it comes to a car allowance:
Insurance policies for a company car:
Insurance policies for a car allowance:
Maintenance responsibilities for a company car:
Maintenance responsibilities for employees receiving a car allowance:
Fuel and reimbursement policy for a company car:
Fuel and reimbursement policy for employees receiving a car allowance:
Duty of care for a company car:
Duty of care for a car allowance:
Environmental considerations for a company car:
Environmental considerations for a car allowance:
Choice of vehicle in a company car program:
Choice of vehicle for employees receiving a car allowance:
There's no single right way to approach car allowance. It's ultimately a question of whether a company wants to put the responsibility into their employee’s hands. It's in turn up to an employee to consider whether accepting the cash and freedoms that surrounds owning their car is worth the costs in upkeep and salary sacrifice.
Regardless of the approach you decide to take, always research your options carefully.
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.
We've put together this guide to give you the tools you need to plan, create and review your very own employee benefits strategy.
