Here in the UK, almost one million motorists drive a company car. Figures released by HM Customs and Revenue (HMRC) show an increase in the number of company cars on the road for the first time in 10 years, with 950,000 employees paying benefit-in-kind (BIK) tax on a company car in 2014/15, representing a 1% rise on the year before.
But while a company car is still considered a desirable job perk, many employers are now offering a company car allowance as an alternative to a company car. But what is the difference between a company car and a company car allowance and which option is right for you?
To help explain the difference between the two options, Nationwide Vehicle Contracts has put together a short guide to set out the pros and cons of a company car vs a company car allowance.
A company car is a vehicle provided by a firm for the business and private use of an employee. Company cars are usually offered to employees who need to drive as part of their job (e.g. a regional sales manager who needs to commute to different locations) or as ‘perk’ or ‘benefit’ of the job so the employee does not need to source a vehicle themselves.
If you’ve been lucky enough to be offered a company car by your employer and you are able to use it for personal transport outside of work, you will need to pay company car tax on the vehicle, also known as ‘Benefit In Kind’ (BIK). This is because your company car is considered a ‘perk’ paid for by your employer on top of your annual salary and as a result has an indirect financial benefit.
The BIK tax rate on a company car is based on a calculation based on:
The amount of company car tax you’ll pay also depends on your personal income tax bracket so if you’re a 20% tax payer, you’ll pay 20% of the taxable portion of the car’s P11D value and if you’re a 40% tax payer, you’ll pay 40% on the taxable portion of the P11D value. This amount is usually deducted from your monthly pay.
You can find out more about BIK tax rates in our Company Car Tax guide. The HMRC also has a useful company car tax calculator which will work out what the eligibility for tax will be.
If you've been given the option of driving a company car, it's important to weigh up both the pros and cons before deciding whether this option is right for you.
Even with BIK tax rates, a company car offers lots of positive benefits including:
On the flip side, a company car also has lots of considerations, including:
A company car allowance is a cash allowance added to your annual salary which allows you to buy or lease a vehicle privately. A company car allowance is becoming increasingly popular with employers as an alternative to a company car as it offers the employee of the perks of a new vehicle without the employer having the hassle of running a car fleet.
There are no set rules as to amount that your employer will pay you as a company car allowance but it is generally assumed that the cash you'll be offered will be roughly what your employer would have paid to lease the company car.
While do you not have to worry about company car tax rates with a company car allowance, as the cash alternative is paid as part of salary, it will be taxed at the normal income tax rate and the contributions from your employer will also be taxed at source, just as your salary is.
Once again, it is important to weigh up both the pros and cons of choosing a company car allowance over a company car before deciding whether this option is right for you.
A company car allowance offers many benefits, including:
A company car allowance also has lots of considerations, including:
Unfortunately, there is not “one size fits all” answer when it comes to deciding whether to take a company car or company car allowance. As with most aspects of driving, this is a personal decision based on your individual circumstances such as your personal needs, financial situation and other tax liabilities. That is why it is important to research both options before making a decision either way.
As the option that saves you the most money is usually the preferred route for most people, it may be helpful to work out the most cost-effective route for you. One way to do this is to take the monthly car allowance being offered to you and deduct any tax or National Insurance contributions. You then need to add in the tax saving of not driving a company car. Compare this to the costs involved in driving a company car and think about whether the money you have left will allow you to cover your remaining motoring costs such as insurance, repairs and depreciation. Don’t forget to factor in any fuel benefit offered on your company car.
It is also important to consider your personal circumstances. For instance, if you expect to do a lot of private mileage, then you may be better off with a company car allowance rather than a company car. It also depends on whether you want the security of owning your own vehicle or whether you would prefer to drive a company car to avoid the expense of depreciation. At the end of the day, it’s all about personal choice and which factors matter the most to you.
At the end of the day, it’s all about personal choice and which factors matter the most to you.