In recent years, many employers have been taking a close look at the benefits package they offer their employees. After all, the average cost of replacing an employee can be as much as £30,000 so it’s in a company’s best interest to keep it’s staff happy and committed.
The Company Car Allowance is a popular benefit we are seeing more frequently within a benefit package, taking over from the previously popular 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 last few years resulting in less of a tax benefit for both employers and employees if they choose to stick with a Company Car scheme. These days many employees are better-off opting to take the Company Car Allowance if one is available.
Of course, given the choice of Company Car Allowance or Company Car, one should carefully consider the pros and cons for one’s specific circumstances.
For this blog, we teamed up with Tim Warr of Warr & Co Accountants to provide you with a little more detail about what the Company Car Allowance actually is.
What is the Company Car Allowance
The Company Car Allowance is a cash benefit type scheme offered to new employees or an employee who is updating their current working contract. The Company Car Allowance is generally seen to be taking over from the traditional Company Car offered by many businesses.
However, Company Cars and Company Fleets are still vital in some industries. An example would be companies providing labourers country-wide.
The Company Car Allowance is usually paid to an employee monthly, sometimes annually, and is to be set aside to pay for a vehicle for that employee to use for business purposes. The vehicle in question could be a currently owned vehicle, a lease hire vehicle or a new vehicle that the employee plans to buy outright and then apply their Allowance retroactively to offset the upfront cost of a new vehicle.
The amount you will be offered as an Allowance will depend on a number of factors and will always be set by the company. There is no Government guidance on how much Company Car Allowance should be offered. Read our blog explaining how the Company Car Allowance is calculated for more information on this.
How Does The Company Car Allowance Work for Employees
As mentioned above, the Company Car Allowance is a cash benefit scheme. That means you’ll still be taxed on the amount of allowance afforded to you, the same tax rules apply to your Allowance as they do to your salary. So do bear this in mind if you’re a Higher Rate Tax payer, or if you’re close to the Higher Rate category. You will pay both Tax and National Insurance on the Allowance offered to you, but you will not have to pay Benefit In Kind on the vehicle as you would do with a Company Car.
Usually your employer will add your monthly Allowance to your monthly salary payments, but it’s best to check this detail with your employer before making any decisions.
Once it’s in your account, it’s yours to use as you wish. So if you already have a vehicle you’d like to use for work purposes and don’t wish to acquire a second vehicle with your Allowance, then it’s money in your pocket. Though it would be wise to set aside a portion of this Allowance for future vehicle maintenance costs and increased insurance costs (you do need to inform your insurer if you plan to use your current vehicle for work purposes).
If you’d like to either buy, rent or lease hire a new or used vehicle, you have a wide choice of cars, vans, etc available to you. And you can usually sign a lease hire agreement, even if your credit rating is poor, so long as you have evidence of a Company Car Allowance scheme provided by your employer. But be aware that you’re signing the contract, not your employer, so you alone are responsible for the vehicle regardless of your employment status.
And as mentioned above, it’s yours to use as you wish, for some people the Company Car Allowance will not even be used for a vehicle. You can use this money to cover season tickets on public transport or buy a bicycle. Most employers don’t require evidence of how you have used your Company Car Allowance.
How Does The Company Car Allowance Work for Companies
For companies, the popularity of the Car Allowance over the Company Car is a welcome change. Maintaining a fleet of vehicles is often an administrative headache.
So offering the Cash Allowance option often means less work for the business as well as a tax saving and cost saving. The company will not pay for repairs, will not suffer from depreciation of the vehicle, 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 Car. 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
As a company if you’d like to offer the Allowance instead of a Company Car, you simply need to calculate a reasonable Cash Allowance amount per employee and then pay this into their monthly salary (or make an annual payment if you prefer). The employee will then use this Allowance as they wish in order to obtain a vehicle to use for business purposes, and usually for personal use too.
The employee will usually claim back business mileage allowance from the company on a monthly or quarterly basis, it’s best you have a policy and process in place for this.
Remember, a car used by an employee for any business purposes is still considered a workplace, so your company still have responsibilities regarding a vehicle paid for by a Company Car Allowance. And as such 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 employee’s 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. A good way to do this is to offer a slightly higher Allowance for any employee that agrees to choose a vehicle with reduced emissions.
Ideally you will 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.