Company Car Or Car Allowance – What’s best?

by Gavin Hooker

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If you’re an employee for a business, there may come a time when you’re offered a company car or car allowance and you need to decide which to take - there are benefits to both!

  • A company car can be great for those who commute lots of miles to benefit as the vehicle is paid for meaning you don’t have to worry about unexpected costs.
  • Car allowance is less common but offers more flexibility as the money can be used to purchase a new set of wheels or pay its running costs. 

What’s the difference between a company car and car allowance?

While both car allowance and a company car are great perks for any employee, there is a significant difference between the two. A company car is a vehicle provided by your employer for you to use, whereas a car allowance is a cash sum that is added onto your annual salary for you to be able to buy or lease a car.

While in both cases you’re responsible for looking after the car, with a company car it’s your employer’s duty to handle any payments and running costs, whereas with a car allowance this would be your responsibility.

Benefits of a company car

There are a number of benefits to having a company car, from low benefit in kind (BIK) tax rates to the freedom of not being tied into any financial agreements. Read our blog “Should I get a company car?” for more details on the tax treatment.

Company cars are usually updated after every 3-4 years which means you’ll always be driving one of the latest vehicles on the market. This also allows you to benefit from the latest vehicle tech while commuting.

In terms of finance payments, it will be the company’s responsibility to ensure the monthly payments are made on time and you will only be charged the BIK tax. As such, there isn’t a risk of being charged for defaulting on payments or any risk of getting into any financial trouble as the vehicle isn’t your financial responsibility.

Disadvantages of a company car

You may want to consider some of the limitations of having a company car if you’re given the option. Here are some points you might want to think over before making your decision.

You may not be able to choose your vehicle

Each business is different, with some having restrictions/limitations in place that may mean you won’t be able to freely choose your own vehicle.

BIK tax could be expensive

Your employer may choose an expensive model car but in doing so cause your BIK tax rates to soar!

For example, if your employer has chosen a nice Lexus IS as it’s company car of choice, its CO2 emissions of 137 g/km would mean you’d have to pay around 32% BIK tax.

You may need to pay Fuel Benefit

If your employer has given you free fuel along with your company car that you make use of during your personal time, you may have to pay fuel benefit tax.

You’ll never own the car

If you end up leaving the business, the car will stay with the company. As a result, you will have to finance your own vehicle, see if your next employer offers a similar scheme, or risk being without a car.

Benefits of car allowance

Car allowance is becoming increasingly popular due to its flexibility, as employers no longer have to manage a fleet of vehicles.

Instead, they can simply add a cash allowance to an employee’s salary reducing admin work and potentially saving them money. Here are the main benefits of car allowance for employees.

Freedom to choose your own vehicle

You have the freedom to choose your own vehicle or to use your personal vehicle for business use. 

You can decide whether to buy or lease

As well as the freedom to choose your own vehicle, you also have the freedom to decide whether you buy or lease the vehicle. This gives you the opportunity to own a car based on the car allowance scheme if you think you will be around for a while, or to simply lease the vehicle over a shorter contract if you might leave the company in the future.

A flexible cash boost

If you already own a car and don’t want to upgrade it, you can still apply for a car allowance and use it to relieve any other financial headaches you may have, such as existing lease or finance payments and car insurance.

Potential to profit if you own the car

Using a car allowance to purchase a car could mean that you profit from it when it comes to selling it on in the future.

Disadvantages of car allowance

Just like with a company car, there are also several disadvantages that you may want to consider before deciding if car allowance is definitely for you. Here are the main things to be aware of.

Finance is your responsibility

Unlike a company car which is under the company, a car financed with car allowance will be your responsibility which could lead to personal financial trouble if not managed correctly.

How much allowance you receive may vary

Since your car allowance is taxed at source, your income tax will ultimately determine how much cash allowance you’re allowed or whether you can have any at all.

Running costs are your responsibility

Unlike a company car, paying for maintenance, servicing, insurance, road tax and fuel will be your responsibility and could end up significantly reducing the car allowance amount you can put towards the vehicle purchase price.

Lots of miles can be expensive

As you’ll be using your personal vehicle for business use, you can claim back on mileage based on the number of business miles you drive, your tax rate and whether or not your employer reimburses you for mileage. This could mean that high mileage drivers are worse off since the amount you can claim back on decreases per mile after the first 10,000.

Should I choose a company car or car allowance?

Deciding whether or not a company or car allowance is suitable for you depends on your current financial situation, your expected mileage and your potential company car.

If you are thinking of investing in a company car, or offering a car allowance, please talk to us about the effect this will have on both your business and you personally.

The content in this blog is correct as at 8 February 2022.

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