Why would you give your employee a company car allowance?
There are very specific benefits connected to providing a company car allowance:
- Owning a company car can be seen as a reward for loyalty
- It provides an alternative to relocation for new employees
- It improves overall employee satisfaction and wellbeing
However, with fuel costs rising amidst concerns over the shift to hybrid and electric cars, the promise of a company car can come with growing costs and taxes. As such, many fleet drivers are choosing to take a cash alternative, reaching for a competitive personal contract purchase (PCP) deal instead.
A company car is still considered a desirable job perk, some employers are now offering a company car allowance as an alternative to a company car. But what is the difference between a company car and a company car allowance and which option is right for you?
In this guide, we explain the pros and cons of both getting a company car and a car allowance. It will arm you with the knowledge you need to make the best decision possible for you. Many people don’t realise the full implications of being offered a car with their work. Insurance, repair liability and tax must all be considered.
What is a car allowance?
A car allowance is a sum of money that’s been added to your annual salary. With this money, you can purchase or lease a car. Some businesses may also offer a mileage allowance alongside a vehicle allowance.
How does a car allowance work?
The first step is to agree with your employer on how much money the company gives to for the use of your car. A survey had found that the average UK car allowance is:
- £10,300 for company heads (directors & c-suite individuals)
- £8,200 for senior managers
- £6,500 for middle managers
- £5,200 for sales representatives
- £4,600 for professionals
Once this is done, the car allowance clause must be added to the employment contract. This should cover:
- How much monetary allowance is given?
- Responsibility for insurance and maintenance
- Mileage allowance
- The cost of fuel as well as wear and tear
How is car allowance taxed?
As car allowance is grouped into an employee’s salary, car allowance tax is charged in line with income tax brackets. This is something to consider if you are nearing or on a high rate of tax.
Car allowance benefits.
The key benefit of an allowance over a company car is that it allows you to pick the car you want rather than whichever car is in the company fleet, and it will own by you, thus you can sell it whenever you want.
What is a company car?
A company car is simply a car a business provides to its employees for both business and sometimes personal use. If you’re able to use your company car for personal transport, you’ll need to pay BIK (Benefit in Kind) tax. This is because the car is a perk that is being paid for by the employer, on top of a salary. Because of this, you benefit financially.
How is BIK tax calculated?
BIK tax is based on the following:
- The age of the car
- The fuel type
- The CO2 emissions
- The engine size
- The list price of the car
The amount an employee will pay also depends on the personal income tax bracket they’re in. For example, if you pay 20% tax, you’ll pay 20% of the taxable portion of the car’s P11D value.
If you supply a company car, you are responsible for the following:
- Car insurance
- Driving costs
Benefits of a Company Car
Company cars allow you to avoid the burdens of financial responsibility because nothing is in your name. If you have an allowance, you are responsible, financially speaking, for the vehicle.
Another benefit is that company cars are also insured, serviced, and repaired by your employer, so you don’t have to worry about that either.
Company Car or Car Allowance, which is better for employees?
Ultimately, it’s a question of finance. Weighing up the benefits, if you’re financially able to insure, service and maintain a car, an allowance is a good way to go. It offers you the freedom of choice and gives you a cash sum, which offers flexibility. If you can’t afford or don’t want the hassle of looking after a car yourself, pick a company car and let your employer worry about it for you.
Whether you need a car to do your job or are offered one as a perk, a company car is a nice thing to have. However, if you’re driving around in a company car, you’ll need to pay Benefit In Kind (BIK) car tax.
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Written by Irina Strucere