Company Car Allowance Explained

6 minutes Published: 24/03/2021

What's Covered

Employees are the backbone of a company, so many employers rightly take the time to mull over the benefits package they offer. A perk like a company car allowance is in a company’s best interest to keep its staff happy and committed!

Traditionally, most employers used company car schemes where employees are granted use of one of the company’s fleet cars for business purposes. The company car allowance is growing more popular now, with benefits for both employees and employers.

This “company car allowance explained” post aims to provide employees and employers with essential information about car allowances. If you’ve got the choice of offering or taking a company car or car allowance or another scheme like a salary sacrifice car lease, you’ve come to the right place.

We’ll firstly outline what a company car allowance is, how it works, and what the pros and cons are for both employers and employees.

What is a Company Car Allowance?

A company car allowance is a cash benefit type scheme offered to new employees or an employee who is updating their current working contract.

The cash allowance is added to an employees annual salary (usually added per month) and is used to pay for a vehicle for business purposes.

The car allowance could be used to finance a car in a number of different ways. For example, the employee can:

  • Make payments towards a vehicle they already currently own/lease.
  • Make payments to lease or buy a new vehicle.
  • Apply their allowance retroactively to offset the upfront cost of buying a new car in full.

The company car allowance gives employees a greater level of freedom and flexibility to use other finance options, rather than sticking to a company car.

What is a reasonable car allowance in the UK?

The amount of car allowance offered is determined by the company themselves. There is no universal Government guidance on how much a company car allowance should be.

We’ve worked with an accountant to explore how the car allowance is calculated if you’d like more information on this!

Why is the Car Allowance Growing in Popularity?

The increased popularity of the car allowance scheme has come about due to HMRC legislative changes.

These changes have cracked down on employee benefits that are classed as benefits in kind (BIK). The BIK rates charged now mean that employers and employees can reap far less tax benefit with the company car scheme.

These days, many employees are better-off opting to take the company car allowance if one is available.

Company car allowance

How does Company Car Allowance work?

A company car allowance works differently depending on whether you’re the employee or the employee. We’ve broken down how the car allowance works for each role below:

Employees

Your employer usually adds the car allowance to your monthly pay cheque. It’s best to confirm how your employer plans to distribute the allowance before agreeing to it.

Once the money hits your account, it’s yours to use as you wish. You can buy, rent, or lease a new car with it. Or, if you already have a vehicle you’d like to use for work purposes, then it’s essentially money in your pocket. 

You should be aware that you are the one signing the contract to buy outright or on a finance agreement, not your employer. You alone are responsible for the vehicle regardless of your employment status.

Since it’s your name on the contract, you might be wondering, “Do you need good credit to lease a car?”. If so, you’re in luck - you can enter the agreement with a poor credit rating. When it comes to your car lease credit check (or equivalent for your chosen finance plan), all you need to do is provide evidence that the money is coming from an employer-issued car allowance scheme.

 

Since it’s your name on the finance contract, you are responsible for:

It would be wise to set aside a portion of the car allowance to cover these costs, rather than using the full whack to pay for the car alone.

 

Employers

For employers, the car allowance is a welcome alternative to traditional company cars. Managing a fleet of company vehicles is often an administrative headache. The car allowance is a hassle-free, tax saving option.

As a company, if you’d like to offer the car allowance instead of a company car, you need to calculate a reasonable cash allowance per employee and add this to their monthly salary (or make a bulk annual payment if you prefer).

You need to state the car allowance entitlement in the employee’s contract, as well as their full responsibilities for the vehicle.

Whilst the employee’s name is attached to any documentation relating to the vehicle, as an employer, you should take measures to ensure that the car is in line with the company’s principles and adheres to safety regulations.

You should keep a copy of your employee’s driving license on file and issue them with a list of prohibited vehicle features. This list can include inappropriate colours or vehicle decals. 

You may consider encouraging employees to choose a vehicle with a low CO2 emissions 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 chooses an electric car lease or hybrid lease model.

 

Will I get taxed on my Company Car Allowance?

The car allowance is grouped together with your salary for tax purposes, so you’ll be taxed in line with your personal income tax bracket.

Your pay slip will show your tax and national insurance contributions deducted for your salary inclusive of the allowance, not before the allowance is added.

Bear this is in mind if you’re already a higher rate tax payer, or you’re edging close to the higher tax rate category. The allowance might push you into the next tax bracket. You need to work out whether the extra tax is worth the car allowance for your specific circumstances.

You won’t have to pay company car tax (benefit in kind) on the vehicle as you would with a company car. With the car allowance, you won’t benefit from the lower company car tax for electric cars, so that is something to factor into your calculations if you want to choose a low emission model.

What are the benefits of a Company Car Allowance?

There are a ton of benefits to a car allowance and they vary by company role:

For Employees

  • Freedom to pick whatever car you want.
  • Flexibility to pick whichever finance method you want.
  • You can keep the car even if you leave the company.
  • You’ll often pay lower tax.
  • If you already have a car, you can use the cash allowance for other things.

For Employers

  • You don’t need to maintain a company fleet.
  • You can still set restrictions for car types/modifications in the contract.
  • You pay per month (or in bulk per year) and have no other financial obligations.
  • It’s a great incentive to attract and retain staff.

What is Company Car Mileage Allowance? 

In addition to a car allowance, a company might also offer a car mileage allowance.

Employees can claim back money within the limits of their business mileage allowance on a monthly or quarterly basis.

This can be offered in addition to or as an alternative to the company car allowance.

It usually works as a reimbursement which covers expenses like fair wear and tear (see the BVRLA guidelines if leasing) and running costs. 

The approved private mileage costs set out by HMRC for cars and vans is 45p per mile for the first 10,000 miles, then 25p per mile after that (correct at time of article publication) If your employer isn’t reimbursing you at least that much you can claim it back from the taxman.

Need more information?

Whether you’re looking for a personal car leasing deal or buying outright, we hope this helps you work out the best option for you. 

If you opt for the car allowance and you’re interested in leasing, check our personal contract hire guide to make sure you can make the most of the allowance.