Company Car Or Car Allowance?
What's Covered
- Introduction
- Which option is best for me?
- How to calculate tax on company car allowance?
- How to calculate tax on a company car?
- Example 1 - Choose Either
- Example 2 - Choose Either
- Example 3 - Choose Either
- Example 4 - Choose Car Allowance
- Will I pay less tax on a company car or a car allowance?
- Non-tax expenses to consider
- Personal preferences
- Pros and cons of car allowance
- Pros and cons of company car
- Summary
- Need More Info?
Is your company is offering you the choice of a company car or a cash car allowance? Is your brain frazzled trying to work out which option works out best for you? We're here to help!
In 2021, HMRC closed a loophole which meant you could simply pick whichever option worked out cheapest tax-wise.
If you were only given the option of a company car, you are always subject to company car tax (A.K.A. benefit in kind, or BIK). For 2022-23, the BIK rate for electric cars is just 2%, resulting in rock bottom company car tax.
If you go for a company car allowance, it is taxed as additional salary, so you pay income tax on it.
If you're given the choice between the two:
- If you choose the car allowance, you always pay income tax on it.
- If you choose a company car, you pay whichever is highest between BIK tax or the value of the car allowance alternative.
In this article, we're going to explain:
- How to calculate company car tax and income tax on car allowance and show you several worked examples.
- What other non-tax considerations should guide your choice.
- The pros and cons of both options.
If you're an employer looking to lease a company car, or an employee looking to use an allowance for a personal lease, Lease Fetcher is here on hand. Compare car lease deals for a personal lease or business lease with ease with us.
Which option is best for me?
Deciding which option is best for you depends on:
- How much tax you'd pay with each option.
- Whether you'd need to dip into your personal funds to cover other expenses.
- What your personal preferences are when it comes to driving for work.
The amount of cash you'll have to fork out is likely the most important factor for you, so we'll look at tax firstly.
If you're given the option between the two, the amount of tax you pay depends on whether you choose to take the car allowance or company car.
- If you choose the car allowance, you'll always pay income tax and NI contributions on the car allowance.
- If you choose the company car, you pay whichever is highest between the monetary value of the car allowance or the benefit in kind tax on the company car.
We've got a few examples to demonstrate how you'd work this out below. In general, if you are being given the option of an electric company car, you will almost always pay income tax rather than BIK tax, regardless of the cost of the car and your personal income tax band.
How to calculate tax on company car allowance?
We've dedicated a full post to explaining how car allowance works, so if you aren't being given the option between the car allowance or company car, then we advise you head on there - what's to come in this post is a bit of headache to wrap your head around!
Your car allowance is normally added on to your monthly salary. Because of this, HMRC views it as additional salary (rather than an additional work perk). Since it is considered part of your salary, you need to pay:
- Income tax
- NI contributions
- Pension contributions
- Student loan repayments
On the whole lump sum (your original salary minus personal allowance and the car allowance together). At Lease Fetcher, we're not accountants, so we are only going to focus on income tax/NIC for the purposes of comparison.
We have used this GOV.UK tool to work out income tax and NIC contributions for Scotland vs England/Wales.
Your income tax band differs depending on where you are in the UK:
How to calculate tax on a company car?
A company car is seen as an additional work benefit, so you need to pay benefit in kind tax (also referred to as BIK tax, or company car tax). We've dedicated a whole post to how company car tax works, so if you don't have the option of a car allowance, please head there!
This calculation is based on the value of the car, the amount of CO2 it emits, and your personal income tax band.
Use the following calculation to work out how much tax you'll pay in company car tax:
P11D Value of the car (original list price) x CO2 tax band % x Your Personal Income Tax Band % = Total Yearly BIK Tax (divide by 12 for monthly figure).
To find the CO2 tax band, you see this list of up-to-date BIK tax rates. We have linked the income tax bands in the section above, depending on where you live.
Example 1 - Choose Either
To make things easier (we hope), we'll use the example of "Jane":
- Earns £40,000 a year.
- Lives in Scotland so pays 21% income tax.
- Is being offered a £6,000 car allowance OR a Hyundai Ioniq Electric Premium Trim company car.
Let's see how much the company car tax comes to first.
- P11D Value: £30,550 (correct as of 18/1/22)
- CO2 Band %: 2%
- Income Tax %: 21%
- Total BIK Tax: £30,550 x 2% x 21% = £128.31/yr or £10.69/month.
- Standard Income Tax and NIC: £9,596.51/yr or £799.71/month.
- BIK Tax + Income Tax: £9,724.82/yr or £810.40/month.
Sweet deal right? Unfortunately, since Jane is given the option between the two, she has to pay whichever is highest between the allowance value and BIK tax - which is the car allowance. Even though she's taking the company car, since the car allowance tax is higher, she has to pay the income tax + NIC.
In this instance, regardless of whether Jane takes the car allowance or the company car, she has to pay income tax, not BIK tax.
- Original Salary: £40,000
- Car Allowance: £6,000
- New Salary: £46,000
- Total Income Tax + NIC Owed: £12,117.31/yr or £1,009.77/month.
Since Jane must be taxed on the car allowance, she actually has to pay £2,392.49 more than she would of if she had only been given the company car tax option. Not a very sweet deal...
How would it work if Jane were in England?
Example 2 - Choose Either
Jane's company ask her to relocate to England. How would the situation change now?
- Earns £40,000 a year.
- Lives in England so pays 20% income tax.
- Is being offered a £6,000 car allowance OR a Hyundai Ioniq Electric Premium Trim company car.
Let's see how much the company car tax comes to first.
- P11D Value: £30,550 (correct as of 18/1/22)
- CO2 Band %: 2%
- Income Tax %: 20%
- Total BIK Tax: £30,550 x 2% x 20% = £122.20/yr or £10.18/month.
- Standard Income Tax + NIC: £9,475.10/yr or £789.59/month.
- BIK Tax + Income Tax: £9,597.30/month or £799.78/month.
Jane's BIK liability is now even less than it would be if she were in Scotland, so she still has to pay income tax on the higher value of the cash allowance.
- Original Salary: £40,000
- Car Allowance: £6,000
- New Salary: £46,000
- Total Income Tax + NIC Owed: £11,470.10 or £955.84/month.
Now Jane only needs to pay £1,872.80 more than she would if she only had the company car option.
Example 3 - Choose Either
Jane decided she was too homesick and moves back to Scotland. Her company shakes up their car options for her:
- Earns £40,000 a year.
- Lives in Scotland so pays 21% income tax.
- Is being offered a £6,000 car allowance OR a Mercedes E Class Saloon AMG Line (diesel).
This new car costs £40,385 to buy outright and it emits 154g CO2/km, placing it in the 35% CO2 tax band. But because it's a diesel, an extra 4% is added on top of this, bringing it to 39%. Ouch. Will the BIK tax work out more than her car allowance this time?
- P11D Value: £40,385 (correct as of 18/1/22)
- CO2 Band %: 39%
- Income Tax %: 21%
- Total BIK Tax: £40,385 x 39% x 21% = £3,307.53
- Standard Income Tax + NIC: £9,596.51/yr or £799.71/month.
- BIK Tax + Income Tax: £12,904.04/yr or £1,075.37/month.
Even though she is being offered a much pricier car which is a major gas guzzler, the BIK tax is still lower than the £6,000 allowance, so she'll have to pay income tax on the allowance no matter which option she chooses.
As we already outlined in Example 1, if Jane took the car allowance in Scotland, she would pay £12,117.31 or £1,009.77/month in income tax and NIC.
This is actually £786.73 less per year than the company car tax and income tax together, so she is quids in!
Example 4 - Choose Car Allowance
Jane's company decide she deserves a big pay bump. This is how her situation looks in this final example:
- Earns £60,000 a year.
- Lives in Scotland so pays 41% income tax.
- Is being offered a £6,000 car allowance OR a Mercedes E Class Saloon AMG Line (diesel).
How much company car tax would she be liable to pay?
- P11D Value: £40,385 (correct as of 18/1/22)
- CO2 Band %: 39%
- Income Tax %: 41%
- Total BIK Tax: £40,385 x 39% x 41% = £6,457.56
- Standard Income Tax + NIC: £18,739.31/yr or £1,561.61/month.
- BIK Tax + Income Tax: £25,196.87/yr or £2,099.74/month.
For the first time in our examples, if Jane took the company car, she would pay BIK tax on the company car rather than income tax on the allowance! But would she be better off taking the car allowance instead?
- Original Salary: £60,000
- Car Allowance: £6,000
- New Salary: £66,000
- Personal Income Tax %: 41%
- Total Income Tax Owed: £21,394.31/yr or £1,782.86/month.
In this case, in terms of tax only, Jane would be better off going for the car allowance, since the income tax works out lower than her income tax + BIK with the company car. She would save £3,802.56/yr or £316.88/month in tax.
Will I pay less tax on a company car or a car allowance?
As we said already, HMRC have closed loopholes that previously allowed you to simply choose the option which resulted in the least amount of tax.
If you go for the company car, you pay the option which results in the most tax regardless.
However, if you work out that the potential BIK tax is more than the income tax on your car allowance, then you should choose the car allowance, as you’ll always pay income tax, never BIK.
In general:
- BIK tax is almost always lower if you're being offered an electric company car, even if the car cost £100,000+ and you're in the highest income tax band.
- BIK tax is usually only higher if the company car is very, very expensive and/or emits a very high amount of CO2/km. You should follow the company car tax calculation to work out what your BIK liability would be.
If you are being offered an incredibly expensive company car that emits CO2 like there's no tomorrow, then, purely from a tax perspective (and eco-conscious perspective...), you are often better taking the car allowance.
Other Non-Tax Expenses To Consider
Let's take a look at other expenses Jane might need to consider.
If she went for the car allowance of £6,000, and was a 21% tax payer, this actually leaves her with £4,740 to get a car with, or £395/month.
So that she doesn't have to dip into her own savings, this £395/month needs to cover the cost of his monthly finance (if she goes for a finance deal, like a lease) and other ongoing costs like insurance and maintenance.
Whilst it's hard to give a concrete figure for insurance and maintenance, we can roughly work out how well the car allowance stretches based on UK averages:
- Average Car Maintenance Costs: £150/year
- Average Car Insurance Costs: £436/year
- Total Maintenance and Insurance Costs: £586/year.
- Post-Tax Car Allowance - Insurance/Maintenance = £4,154/year or £346/month
This isn't an exact science, and she would need to consider things like fuel too, but Jane would be free to get a car somewhere in the region of £300-346 a month. She has plenty of choices (just look at these available car lease deals for £300-350 a month with 1 month initial rental) so she won't need to dip into her own pocket.
If Jane was a 41% tax payer, it would not be as generous. £6,000 taxed at 41% leaves her with £3,540/year, and when you subtract £586/year for insurance and maintenance, it leaves her with a maximum £246 to play around with without dipping into her personal funds. This massively limits her choice of cars, leaving her with much smaller car models available to lease for £200-250 a month with 1 month initial rental.
Personal Preferences
You should also consider your personal preferences and circumstances when making your final decision.
If you plan to cover a lot of private mileage, a car allowance might suit you better. You'll use the car as your personal car too, and you'll be able to reclaim business mileage. The car will be yours to keep even if you leave your company, which won't leave you in the lurch without a main family car.
However, with a company car, most of the responsibility for repairs and maintenance is on the company's shoulders. If you already have a hectic life and a main family car, you might not want the hassle of organising ongoing servicing, MOTs, and more for an additional car.
These personal preferences should be considered alongside the total costs of each option so you can properly decide whether a company car or car allowance suits you best.
Pros and Cons of Car Allowance
Pros
-
Employee has freedom to pick whatever car and finance method they want.
-
The employee gets to keep the car if they leave the company and resell if they wish.
-
The employee may pay lower tax if the company car alternative is very expensive/not electric.
-
The employee may be able to use the cash allowance for other things if they already own a car.
Cons
-
Employee has to take the finance out in their own name which they may not want to do.
-
Repairs, maintenance, servicing, insurance is the employee's responsibility to arrange.
-
High annual mileage can make private finance schemes very pricey.
-
If BIK tax works out more expensive on company car alternative, you only have to pay income tax on the allowance.
Pros and Cons of Company Car
Pros
-
Employee is not tied down to a car finance contract.
-
Repairs, maintenance, servicing, insurance is usually covered by the employer.
-
Employee doesn't need to worry about being left with a depreciating asset.
-
No need to pass credit/affordability checks or place deposits for a car.
Cons
-
Employee may not get a say in which car they get.
-
Employee can't modify or upgrade the car since they don't own it.
-
Usually no tax benefits to choosing an EV if you have the option of company car/car allowance.
-
If the employee leaves the company, they don't get to keep the car.
Company Cars Vs Car Allowance
To summarise, the car allowance is a good option if:
- The BIK value of the company car is equal or less than the value of the cash allowance.
- If you want a car you can use as a main personal car too and want full control over it.
- You want the freedom to pick a specific model and finance type.
A company car is a good option if:
- The value of the cash allowance is equal or less than the BIK tax value.
- If you want less responsibility over maintenance and repairs.
- If you already have a primary personal car and wouldn't use the company car as much.
Need more info?
If you’re interested in knowing a little bit more about how company car tax (or company car tax on electric cars) and company car allowance work, we've written some great guides.
If you decide to go for the car allowance and you're not sure whether to lease or buy a car, make sure you fully inform yourself! Read up on how car leasing works, the cost to lease a car and compare lease deals with us - we have gathered the best personal leasing deals on the UK market right now. You may be entitled to a car lease tax deduction if you go down this route.
If you're a business owner and decide to offer the company car instead, read up on how business car leasing works and check out our business car leasing deals!
What's Covered
- Introduction
- Which option is best for me?
- How to calculate tax on company car allowance?
- How to calculate tax on a company car?
- Example 1 - Choose Either
- Example 2 - Choose Either
- Example 3 - Choose Either
- Example 4 - Choose Car Allowance
- Will I pay less tax on a company car or a car allowance?
- Non-tax expenses to consider
- Personal preferences
- Pros and cons of car allowance
- Pros and cons of company car
- Summary
- Need More Info?