Company Car Allowance or Company Car
Many businesses offer eligible employees the choice between choosing a company car or a company car allowance.
For many, this can be a difficult choice with many different factors to take into consideration. The changing economic situation and fiscal framework have proven a dynamic backdrop to a driver’s decision. The wide availability of personal leasing through personal contract hire (PCH) and personal contract purchase (PCP) offers drivers a genuine alternative to a company vehicle.
From the employers perspective, factors such as environmental impact and managing duty of care have impacted 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. 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:
Vehicle Type
Is the type of vehicle which you wish to drive available on the company car scheme? For example, many policies restrict the ability to get cabriolets or 4×4 cars, which can be popular with senior management.
Excluding extras such as towbars will be an issue for those with a caravan, horsebox or certain types of bike racks.
Band Limits
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 upfront for any trade up to avoid payroll issues should the employee leave midway through the contract.
How is Company Car Tax Calculated?
Many organisations provide employees with company cars which are used for both personal and business use. So how do you calculate the tax an employee and an employer will pay on each vehicle?
Company Cars
P11D is a form that HMRC requires all employers to complete. It details the cash equivalent values of all benefits and expenses that have been supplied during the tax year. This could include items such as private health care or relocation expenses as well as the company car.
How is the P11D value calculated?
List Price of the Vehicle, including VAT but excluding First Year Registration Fee and Vehicle Excise Duty (VED) PLUS
List price of any accessories, including VAT PLUS
Delivery Charges MINUS
Capital contributions made by the employee EQUALS
P11D Value
The value of the benefit is then calculated by multiplying the P11D value by the taxable percentage which is based on the CO2 and fuel type of the vehicle concerned (HMRC Link).
HMRC offer an online calculation tool which can be found here.
The benefit in kinds can be adjusted under certain circumstances such as:
- The vehicle was only available for part of the tax year
- The vehicle was unavailable for a period of time (minimum 30 consecutive days or more)
- The employee has contributed to the private use of the vehicle
- The vehicle was shared between employees for a period of time
If the driver can prove there is no personal use of the vehicle then there is no associated benefit in kind.
Employees will pay tax at their marginal tax rate based in the benefit in kind value and employers will pay Class 1A National Insurance contributions on the benefit in kind value.
Company Vans
Company van taxation is a little simpler to calculate than the company car. Where there is a single driver of the vehicle and private use of the van by the driver this attracts an annual benefit in kind charge of £3,600. The employer will pay employers national insurance contributions on this value.
Vans used for ‘insignificant’ private journeys are exempt, for example making a slight detour to pick up a newspaper on the way to work
Salary Sacrifice Vehicles
Vehicles leased under a salary sacrifice arrangement are subject to the same treatment as company cars. For more information please visit our salary sacrifice page.
Private Fuel Benefit Calculation
Where private fuel is offered to the employee this attracts a benefit in kind charge.
The multiplier for the car fuel benefit is £27,800. The value of the benefit is calculated by using the same vehicle taxable percentage used for company car tax purposes.
The flat-rate van fuel benefit charge is £757.
For more information regarding company car policy and procedures please visit our dedicated page here.
Disclaimer
EVP Solutions offer no guarantee these values are applicable at the time of reviewing this blog.
Commitment
How long do I have to keep the vehicle, and over what mileage? Company cars have moved towards more extended contracts as the technology for vehicles improves. In addition, 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?
Fuel
How is business fuel for the vehicle by the company and what are the applicable mileage rates? Will the fuel payment cover the actual cost of fuel based on the anticipated efficiency of the vehicle?
Do I get a fuel card? Do I get the option to take private fuel with the company car?
For the company car allowance, consider the following questions when making a comparison:
Net Allowance
What is my monthly allowance, and how much will this be worth after tax? Could my allowance change if I receive a promotion?
Running Costs
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?
Vehicle Use
What is my annual forecast mileage both from a business and personal perspective?
How will this impact the running costs of the vehicle if it changes significantly? For example, am I likely to be changing roles within the timescales I expect to keep the vehicle?
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 several financial implications to take into account when choosing between company cars or company car allowance.
Company cars attract a taxable benefit based on the vehicle’s list price (P11D cost), CO2 emissions, and fuel type. A further taxable benefit is levied where the employee receives free fuel for private use, making it more expensive than the fuel used.
Employees receiving a company car allowance pay tax and national insurance on the gross cash amount payable at their marginal rate. 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 after that).
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 | |
| Private Fuel | X | Insurance | X | ||
| Running Costs | X | ||||
Vehicle Choice
Employees opting for the company car allowance will need to source a vehicle. The market for personal leases has grown significantly over recent years, and the choice is vast. However, it is essential to look at the total cost of these offers. Many offer a very low rental but come with a significant deposit requirement. In addition, it is vital to check the contract mileage fits the individual profile as excess mileage charges can be high. Finally, 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 the 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. Critical 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 a major part failure within the vehicle.
The Employer Perspective
The company car scheme can form an important part of an employee benefits package and represent a high cost. The company car can play an essential role in attracting and retaining staff. One supermarket offers an Audi A4 to graduate trainees to differentiate them from other supermarkets and attract the best graduates.
The employer also has responsibilities under Health and Safety legislation to ensure their drivers are safe on the road. In addition, there are likely to be many stakeholders involved in the policy-setting process, such as HR, Finance, H&S, Tax and Payroll.
The company car policy will factor in several variables to decide what level allowance levels and policy choices are appropriate. Factors include:
Job Role
What job roles are my employees fulfilling. For example, 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 roles or working practices?
Eligibility
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?
Cost
What will be the cost of 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 credit rating strong enough to support the company car program, or will the borrowing impact other areas? Will the fleet grow, shrink or remain steady over the medium to long term time horizon.
Administration
How will company vehicles be provided to employees, and what internal resource will this consume? Is there a requirement for digital infrastructure to support the company car scheme? How will insurance and payroll processes work?
Many organisations have split employees into two distinct groups, “job needs” and “status” drivers. For job need drivers, the trend has been to be more prescriptive about vehicle choice to maximise discounts from manufacturers, increase the ability to reallocate vehicles and ultimately reduce cost.
The choice is generally wider for status drivers, with more flexibility to trade up or down to suit a driver’s lifestyle choices.
Therefore, employers are more likely to offer cash allowances to status drivers than those classified as job needs. In either case, employers need to monitor what vehicles their drivers are using and check if they are fit for purpose, which helps meet their duty of care obligations.
Financial Comparison
Set any cash allowance at a position that is cash neutral to the company car scheme. 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 balance, helping control the overall cost.
The table below gives some costs that companies must consider 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 |
| Insurance | |
| End of contract charges | |
| Administration & Overhead Costs |
As the table demonstrates, there is a wide range of costs that impact the overall provision of either cash or company car.
As to which one is best, it depends on the organisation concerned. Attitudes towards risk, types of drivers, company strategy, and overall benefits packages will all impact the most appropriate policy.
Any company should continue to actively monitor costs and travel patterns to ensure that any assumptions made when creating the policy are valid.
EVP Solutions has extensive experience providing advice concerning company car policies, creation and maintenance of choice lists.
If you would like some support with your vehicle policy decisions, please contact us.