COMPANY car or cash allowance? Either can be attractive when it comes to the benefits package offered to employees.
The average cost of replacing an employee can be high so it’s important to keep staff happy and committed.
The company car allowance is being used more frequently within a benefit package, taking over from the company car schemes.
While these schemes usually use car leasing, they can use other finance options or outright purchase.
The switch in scheme popularity has come about due to legislative changes over the past few years resulting in less of a tax benefit for both employers and employees if they choose to stick with a company car scheme.
Many employees are better-off opting to take an allowance if one is available.
How do company car allowances work?
A company car allowance is money added to an annual salary, which allowing an employee to buy or lease a vehicle themselves.
Many people don’t realise the full implications of being offered a car with their work. Insurance, repair liability and tax must all be taken into account.
Is car allowance taxable?
Since the allowance is paid as part of a salary, it will be taxed at the normal income tax rate.
Looking at the benefits, if an employee is financially able to insure, service and maintain a car, an allowance is a good way to go.
It offers freedom of choice and provides a cash sum, which offers flexibility.
The key benefit of an allowance is that it allows you to pick the car you want and sell it whenever you want.
For companies, the growing popularity of the car allowance over a company car is a welcome change. Maintaining a fleet of vehicles is often an administrative headache.
Offering an allowance can mean less work for the business as well as a tax saving and cost saving.
The company will not pay for repairs, will not take a hit on depreciation, will not have valuable assets to secure and will not be responsible for any early termination fees associated with an unwanted or written-off company vehicle.
The company will also not be responsible for any tax on the vehicles used, as this is covered by the employee in a company car allowance scheme
If want to offer an allowance instead of a company car, you need to calculate a reasonable cash allowance amount per employee and then pay this into their monthly salary.
What is a company car mileage allowance?
The employee will usually claim back business mileage allowance on a monthly or quarterly basis, so have a policy and process in place for this.
Important to remember that a car used by an employee for any business purposes is still considered a workplace, so your company still have responsibilities.
You should have processes in-place to ensure the drivers are qualified, using an appropriate vehicle and are as safe as possible.
As a minimum you should ensure you have a copy of each employees drivers’ licence on file and have a list of prohibited vehicle features.
This list can include inappropriate colours or vehicle decals. You may also consider encouraging employees to choose a vehicle with a low carbon footprint to assist in your company-wide carbon footprint reducing efforts.
One way to do this is to offer a slightly higher allowance for those who choose a vehicle with reduced emissions.
You should also have processes in-place to ensure you have a record of your employees’ vehicle MOT dates and servicing, proof of appropriate insurance coverage, and policies to help encourage safe driving.