Company Car vs Car Allowance: Which Should You Choose?

Although a company car continues to be seen as an enticing work perk to most, employees are increasingly being offered a cash allowance as an alternative to a company car scheme. But what’s the difference between a company car scheme and car allowance? This guide looks at the costs, long-term implications, advantages and disadvantages of both to help you decide which option best suits your needs.

What is a company car scheme?

A company car scheme is where a company offers its employees a vehicle for personal and business use. Company cars are usually offered to those who need to drive as a requirement of their job or to other employees as an additional work perk, typically with comprehensive car insurance included.

One popular company car scheme is salary sacrifice, where an employee gives up part of their gross salary in exchange for a fully maintained and insured new vehicle. As the salary is sacrificed before tax and national insurance contributions are taken, the employee effectively gets a brand new car at a significantly lower cost than the retail market. Typically, servicing, maintenance and fully comprehensive motor insurance is included in a company car scheme.

How does a company car scheme work?

To enter into a company car scheme, employees generally need to be in a substantive or permanent position within the business and have a regular pattern of work. Their wage must also not drop below the national minimum wage once they join the scheme.

Employees who enter a company car scheme will have to pay company car tax, also known as Benefit in Kind (BIK) tax, as the vehicle is considered a perk on top of their salary.

How much tax they’ll pay depends on a range of factors, including the vehicle market price, fuel type, income tax band and amount of CO2 emissions. If your company car scheme includes fuel, you’ll also need to pay fuel benefit tax on the cash equivalent of your annual fuel allowance.

Pros and cons of company car schemes

When effectively managed, a company car scheme is an attractive way for employees to save on the cost of driving a brand new vehicle, even after paying BIK tax.

Some of the other benefits of company car schemes include:

Insurance, servicing and maintenance are paid by the employer
You don’t have to worry about depreciation costs as you never own the vehicle
The opportunity to drive a brand new model every three or four years
You can opt for a model which you otherwise may not be able to afford, with access to the latest gadgets and fuel-saving technologies
No deposit and no credit check

While there are many benefits to taking a company car, there are some downsides that you need to take into consideration. These include:

You’ll need to pay BIK tax and tax on your fuel allowance depending on the type of scheme
The company may limit the range of vehicles you can choose from
BIK tax can be costly for higher value vehicles
You don’t own the car so will need to return it if you change jobs

What is company car allowance?

A company car allowance is a one-time cash sum added to an employee’s annual salary. Employees can use the money to either buy their own car or lease a vehicle privately.

There’s no set rule as to the amount that your employer can pay you as a company car allowance, but generally the cash equates to what your employer would have paid to lease a company car, as well as the business mileage you’ll cover.

Your employer may also give you minimum specifications for the type of vehicle you’re allowed to buy, including the age, CO2 emissions and number of seats.

How does company car allowance work?

While you don’t have to worry about BIK with a company car allowance, it is subject to the same tax as your salary because it’s a cash benefit scheme.

You’ll pay personal income tax and national insurance on the allowance but once it’s in your bank, it’s yours to use as you wish.

Some people don’t use this allowance for a vehicle, choosing instead to cover the cost of public transport.

Pros and cons of company car allowance

The main benefit of a company car allowance is having a wider range of vehicles to choose from as you’re not restricted by the company’s car fleet. Some of the other advantages of a cash alternative to a company car include:

You can choose how you spend the money, either on a new vehicle, a car you already own, or on public transport
You’re investing in an asset that you can sell at a later date
You keep your car if you change your job whereas a company car is taken back
You can save a lot of money if you have low annual mileage
You can choose an electric or hybrid car, which may offer lower running costs and tax benefits

Some of the pitfalls of a company car allowance that you need to take into consideration include:

You’re responsible for the running costs of the vehicle, including the MOT, repairs, insurance and road tax
You’ll pay national insurance and personal income tax on the cash benefit
High mileage can make leasing agreements expensive

Calculating the Cash Allowance Option

When considering a cash allowance option, it’s crucial to understand how employers calculate the amount provided to cover the costs of using your own vehicle for work.

Typically, this cash allowance is based on the company’s estimate of the expenses associated with providing a company car, including fuel, maintenance, insurance, and depreciation.

To determine the cash allowance, employers may take into account several factors:

Type of Vehicle: The kind of vehicle you will be using for work purposes.
Estimated Annual Mileage: How many miles you are expected to drive annually for business.
Fuel Efficiency: The fuel efficiency of your vehicle, which impacts overall fuel costs.
Insurance and Maintenance Costs: The cost of insuring and maintaining your vehicle.
Depreciation Rate: The rate at which your vehicle loses value over time.

Once calculated, the cash allowance is usually paid as a lump sum, and you are responsible for using these funds to cover the costs of your personal vehicle.

It’s important to note that this allowance is taxed as income, and you will need to pay national insurance contributions on the amount received.

Electric and Hybrid Company Cars

Electric and hybrid company cars are gaining traction as more employers seek to reduce their carbon footprint and lower fuel costs.

These vehicles offer numerous advantages, making them an attractive option for both employers and employees.

Benefits of Electric and Hybrid Company Cars:

Lower Fuel Costs: Electric and hybrid vehicles are more fuel-efficient than traditional gasoline-powered cars, leading to significant savings on fuel expenses.
Reduced Emissions: These vehicles produce fewer emissions, helping companies meet their environmental goals and reduce their carbon footprint.
Lower Maintenance Costs: Electric and hybrid cars generally require less maintenance compared to their gasoline counterparts, resulting in additional cost savings.
Tax Benefits: Employers may qualify for tax incentives when providing electric or hybrid company cars to their employees.

There are several models that are known for their efficiency, reliability, and advanced technology, making them excellent choices for a company car scheme.

Tax Implications – Company Car vs Car Allowance

Understanding the tax implications of company cars and car allowances is essential for both employers and employees. Each option has distinct tax considerations that can impact your overall financial situation.

Company Cars:

Benefit-in-Kind (BIK) Tax: Employers must pay BIK tax on company cars, which is calculated based on the vehicle’s CO2 emissions and the employee’s income tax bracket. Employees may also need to pay income tax on the value of the company car.
Fuel Benefit Tax: If the company car scheme includes fuel, employees will need to pay tax on the cash equivalent of their annual fuel allowance.

Car Allowances:

Income Tax: Car allowances are treated as a cash benefit and are taxed as income. Employees will need to pay income tax on the amount received.
National Insurance Contributions: Both employees and employers may be required to pay national insurance contributions on the car allowance.

Understanding these tax implications can help you make a more informed decision when choosing between a company car and a car allowance.

Company car vs car allowance – which is right for me?

As with most choices, which option is best for you depends on your personal circumstances, financial outlook and business requirements. For most people, and businesses, the preferred route tends to be the one that saves the most money.

A car allowance is a good option if you already own a car and don’t need to upgrade or cover the cost of public transport, have a specific vehicle in mind you’d like to buy, or want an asset that you can sell at a later date.

However, if you’re a higher rate taxpayer, you could end up with an amount of cash that’s significantly lower than the value of a company car.

To work out whether a company car or car allowance is the most cost-effective option for you, take the monthly allowance you’d be entitled to, and deduct any tax and national insurance contributions.

If you’re sure that the money you’d have left over would cover your remaining motoring costs like insurance, repairs and depreciation, then a cash alternative could be beneficial.

If not, you may be better off with a company car.

Ultimately, whether you go for a company car scheme or car allowance is up to you. If you have a question regarding leasing a company car, contact our dedicated team today on 0113 387 4241 to discuss your requirements.