Cash Allowance or Company Car? Which Choice Is Best For Your Employees and Your Business?
Many businesses offer eligible employees the choice between choosing a company car or a cash allowance.
For many, this can be 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. The wide availability of personal leasing through personal contract hire (PCH) and personal contract purchase (PCP) offer drivers a genuine alternative to a company vehicle.
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 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 specific wording of the company car policy document. Areas to consider will include:
Is the type of vehicle which you wish to drive available on the company car scheme? Many policies restrict the ability to get cabriolets or 4×4 vehicles which can be a popular choice with senior management. Extras such as towbars may also be excluded which will be an issue for those with a caravan, horsebox or certain types of bike racks.
Is the vehicle you want within the car banding system? Does the company offer the ability to trade up or trade down? Some policies require the driver to pay up front for any trade up to avoid any payroll issues should the employee leave midway though the contract.
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? How is this impacted by trade up or trade down payments?
How long to I have to keep the vehicle and over what mileage? Company cars have moved towards longer contracts as the technology for vehicles improves. Manufacturers have moved away from short term volume sales to profitable sales which means discount structures have changed. What happens if I leave the company during the lifecycle of the vehicle contract?
How is business fuel for the vehicle by the company? Do I get a fuel card? Do I get the option to take private fuel with the company car? Will the fuel payment cover the actual cost of fuel based on the anticipated efficiency of the vehicle?
For the cash allowance the following questions should be considered when making a comparison:
What is my monthly cash allowance and how much will this be worth after tax? Could my allowance change if I am promoted?
How much will it cost to tax and insure the vehicle? What will happen to my insurance premiums if I have an accident? What are the likely running costs for the vehicle including depreciation, maintenance, tyres and glass?
What is my forecast annual mileage both from a business and personal perspective? How will this impact on the running costs of the vehicle if it changes significantly. Am I likely to be changing roles within the timescales I expect to keep the vehicle for.
Mileage & Fuel
How is fuel or mileage re-reimbursed for the vehicle I would like? Will there be any mileage tax relief available? What are the timings on getting repaid for mileage and tax relief?
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 Car||Income||Cost||Cash Allowance||Income||Cost|
|Company Car Tax||X||Net Cash Allowance||X|
|Trade up or down||X||X||Mileage Tax Relief||X|
Employees opting for the cash allowance will need to source a vehicle. The market for personal leases has grown significantly over recent years and the choice is wide. However, it is important to look at the total cost of these offers. Many offer a very low rental but come with a significant deposit requirement. It is important to check the contract mileage fits the individual profile as excess mileage charges can be high. Gap insurance is a worthy consideration for vehicles on a lease arrangement to cover any risk that the insurer does not pay out sufficient market value in event of a write off.
Second hand vehicles offer a cost effective alternative to leasing a vehicle although some lessors now offer second hand leases. Key considerations for these vehicles relate to the maintenance and warranty of the vehicle. Additional warranties can be purchased for those wanting to guard against high repair bills in the event of a major part failure within the vehicle.
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. As such there are likely to be a number of stakeholders involved in the policy setting process such as HR, Finance, H&S, Tax and Payroll.
The company car policy will factor in a number of variables to decide on what level allowance levels and policy choices are appropriate. Factors include:
What job roles are my employees fulfilling. Do they need to carry goods and what mileage patterns are they expected to travel. Are there any changes planned within the organisation which may impact on roles or working patterns.
Who should be eligible for a company car? What are our competitors offering to employees and how does this fit into the overall benefits package?
What will be the cost for providing the vehicles? Can we get additional discounts from manufacturers for committing to volumes or restricting choice within the policy. What are the variables which may mean the actual costs go up or down over the medium term. Is the company credit rating strong enough to support the company car program or will other areas be impacted through increased borrowing? Will the fleet grow, shrink or remain steady over the medium to long term time horizon.
How will company vehicles be provided to employees and what internal resource will this consume? Is there any digital infrastructure which needs to be introduced to support the company car scheme. How will insurance and payroll processes work?
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.
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 Car||Cash Allowance|
|Lease Rental||Gross Allowance|
|Blocked VAT||Employers NI|
|Employers NI||Mileage payment costs|
|Fuel / Mileage Payment Costs||Grey fleet compliance costs|
|Accident / Breakdown||Administration & Overhead charges|
|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
EVP Solutions have extensive experience of providing advice in relation to company car policies, creation and maintenance of choice lists.
If you would like some support with your vehicle policy decisions then please