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.

Vehicle Taxation

How much will the vehicle cost in terms of a company car, both for the current year and the remaining years of the vehicle contract?

How is this impacted by trade up or trade down payments?

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

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 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 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.

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