Cash Allowance or Company Car

In many businesses, employees entitled to a company car will get a choice between choosing a company car or a cash allowance.

For many this is a difficult choice with a number of different factors to take into consideration.  The changing economic situation and fiscal framework has proven to be a dynamic backdrop to a driver’s decision.

From the employers perspective factors such as environmental impact and managing duty of care have impacted on the employer’s perspective on managing the fleet.

So which one is best?  In this blog we explore the options available from the perspective of both employer and employee.

The Employee Perspective

Company cars generally form part of the employee benefits package for middle and senior level managers.   Company cars are also offered to employees on a job need basis due to significant business travel or the need to carry stock for example.  Some employers will offer a cash allowance alternative to all drivers but others restrict the ability to take cash at the job need level.

Company cars are usually accompanied by a fully inclusive maintenance package, breakdown cover, road fund license and come fully insured by the company.  The relative attractiveness of the company car policy will vary significantly from company to company depending on the industry and overall benefits package.

Deciding on cash or company car will generally start with what is available on the company car choice lists and the wording of the company car policy document.  Areas to consider will include:

Vehicle Type | Is the type of vehicle which you wish to drive available on the company car scheme?

Band Limits | Is the vehicle you want within the car banding system or will it require a trade up or will you receive a trade down payment?

Vehicle Taxation | How much will the vehicle cost in terms of company car, both for the current year as well as the remaining years of the vehicle contract?

Commitment | How long to I have to keep the vehicle and over what mileage?  What happens if I leave the company during the lifecycle of the vehicle contract?

Fuel | How is fuel re-imbursed for the vehicle I would like and is this going to cover the actual cost based on the anticipated efficiency of the vehicle?

For the cash allowance the following questions should be considered when making a comparison:

Net Allowance | What is my monthly cash allowance and how much will this be worth after tax?

Running Costs | How much will it cost to tax and insure the vehicle?  What are the likely running costs for the vehicle including depreciation and maintenance?

Vehicle Use | What is your forecast annual mileage both from a business and personal perspective?

Mileage & Fuel | How is fuel or mileage re-reimbursed for the vehicle I would like?  Will there be any mileage tax relief available?

Employee Financial Comparison

There are a number of financial implications to take into account when choosing between company cars or cash allowance.

Company cars attract a taxable benefit based on the list price of the vehicle (P11D cost), CO2 emissions and fuel type.  A further taxable benefit is levied where the employee receives free fuel for private use which often makes it more expensive than the fuel actually used.

Employees in receipt of a cash allowance pay tax and national insurance at their marginal rate, on the gross cash amount payable.  There is however tax relief available for business mileage which is paid to the employee at a rate lower than the government approved mileage allowance payment (AMAP) rate (currently 45ppm for first 10,000 miles and 25ppm thereafter).

A brief financial summary can be found in the table below:

Company CarIncomeCostCash AllowanceIncomeCost
Company Car TaxXNet Cash AllowanceX
Trade up or downXXMileage Tax ReliefX
Private FuelXInsuranceX
Running CostsX

The Employer Perspective

The company car scheme can form a very emotive part of an employee benefits package but also represents a significant cost.  The company car can play an important role in attracting and retaining staff.

One supermarket offers an Audi A4 to new graduate trainees as a way of differentiating them from other supermarkets and attracting the best graduates.

The employer also has responsibilities under Health and Safety legislation to ensure their drivers are safe on the road.

The company car policy will depend on a number of factors to decide on what level is appropriate.  Factors include:

  • What job roles do the employees carry out?
  • Who should be eligible for a company car?
  • What are our competitors offering?
  • How much will it cost?
  • What discount levels are available?
  • Can the company borrow the necessary funds to supply company cars?
  • Is the fleet likely to grow or contract over the medium term?
  • How will company vehicles be provided to employees and what internal resource will this consume?

Many organizations have split employees into two distinct groups, “job need” drivers and “status” drivers.  For job need drivers the trend has been to be more prescriptive about vehicle choice to maximize discounts from manufacturers, increase the ability to reallocate vehicles and ultimately reduce cost.

For status drivers the choice is generally wider with more flexibility to trade up or down to suit a drivers lifestyle choices.

Employers are more likely therefore to offer cash allowances to status drivers than those classified as job need.  In either case employers need to monitor what vehicles their drivers are using and checking if they are fit for purpose, which helps meet their duty of care obligations.

Financial Comparison

Any cash allowance should be set at a position that is cash neutral to the company car scheme.  That is, one should not cost more than the other, unless there is a conscious push to move employees from one group to another.  This ensures the scheme is balanced which helps to control the overall cost.

The table below gives some of the costs which need to be considered to provide an accurate comparison between cash and car:

Company CarCash Allowance
Lease RentalGross Allowance
Blocked VATEmployers NI
Employers NIMileage payment costs
Fuel / Mileage Payment CostsGrey fleet compliance costs
Accident / BreakdownAdministration & Overhead charges
Insurance
End of contract charges
Administration & Overhead Costs

As the table demonstrates there are a wide range of costs which impact on the overall provision of either cash or company car.

As to which one is best it really depends on the organization concerned.  Attitudes towards risk, types of drivers, company strategy and overall benefits packages will all impact on the most appropriate policy.

Any company should continue to actively monitor the costs and travel patterns to ensure any assumptions made when creating the policy are still valid

If you would like some support with your vehicle policy decisions then please

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