Car Allowance or Company Car?
Company cars used to be an attractive perk and a status symbol that many employees aspired to have, however times have changed and the company car is now a huge tax burden that ends up costing both the employer and the employee a lot of money. Company cars are now so expensive many employers and employers simply dismiss the idea. However, many employees still cherish the idea of a “free” car and the company car benefit is now starting to be replaced by the car allowance scheme.
The car allowance scheme is basically additional salary. Under the car allowance scheme the employee receives extra cash in their pay packet that the employee should use to buy or lease a motor vehicle. Rather than the company buying the vehicle, insuring the vehicle, maintaining the vehicle and keeping the vehicle on the road, the responsibility is passed on to the employee. Under the car allowance scheme the employee must buy the vehicle, service the vehicle, maintain the vehicle and fuel the vehicle. The vehicle does not belong to the employer and the employer is not responsible for any costs associated with the vehicle.
Since the car allowance is additional salary it is subject to the same payroll deductions and payroll taxes as regular salary. The car allowance cash is not tax free for the employer either since the amount of the cash allowance is subject to employer’s national insurance contributions.
As the car allowance scheme is still subject to the same payroll taxes as a company car you may well be thinking what the advantages of the car allowance actually are.
Under the current tax regime, the benefit in kind value of a company car is calculated as a percentage of the list price of the vehicle when it was new. The percentage depends on whether the vehicle is fuelled by petrol or diesel and the CO2 emissions of the vehicle. Newer vehicles are more environmentally friendly and have a lower CO2 than older vehicles and smaller capacity vehicles are generally more environmentally friendly than larger capacity vehicles. The ‘cheapest’ company cars are small capacity new cars, which are hardly a status symbol. The benefit in kind on a used company car can work out to be more than the cost of the used car itself, which simply doesn’t make sense. Since the benefit in kind on a company car is calculated on the list price of the new vehicle it is more than feasible for the benefit in kind to be more than the cost of the used vehicle , which is not exactly tax efficient.
Using the car allowance scheme the “taxable benefit” is the cost of the vehicle. It makes no difference whether the vehicle is petrol or diesel, whether vehicle is a gas guzzling tank or a small and environmentally friendly mini, or whether the vehicle is new or used. The fact is the tax payable will be based solely on the cost of the vehicle and not the list price of the vehicle, so there are savings to be made with a second hand vehicle.
Under the car allowance scheme the employee will save as the taxable benefit will be lower. Under the car allowance scheme it is not only the employee who saves as the employer will save on employer’s national insurance contributions, so it is a win-win situation.
It is more tax efficient to get a Lotus Elan sports car with a car allowance than if you had it as a company car. The company car benefit is based on the list price when the car was new, whereas the car allowance is based on the price paid for the car.
Under the car allowance scheme the employees are given cash. Once the employee has bought the vehicle the rest of the money can be used for whatever the employee wants to spend it on. Under many car allowance schemes the employee doesn’t even have to use it to buy a vehicle, so the car allowance is effectively more salary. If the employee has a company car the employee has to have a vehicle and the employee does not get the additional salary.
It is easy to see why many employers prefer to offer their employees a car allowance over a company car, and it is easy to see why many employees prefer to have a car allowance over a company car. However, before deciding on taking the car allowance over a company car you need to carefully consider both options and make some calculations to see which one is the most beneficial.
If your employer states the car allowance must be spent on a vehicle, i.e. the additional cash cannot be used for what you want to use it for, and the vehicle must be a brand new and environmentally friendly there is the chance a company car benefit would work out cheaper. If there are no restrictions imposed by your employer and you have free reign over the car allowance cash the situation may be totally different.
So, if you are given the chance of a car allowance or a company car never rush straight in. You need to take a step back, take your time and do some calculations. Whether the car allowance will be most beneficial will depend entirely on your individual circumstances.