What is the difference between a company car and a company car allowance?
If you see the words ‘company car’ in a job advertisement, you might assume that your employer will provide you with a vehicle. But this isn’t necessarily the case if they’re followed by the word ‘allowance’.
We’ll look at the difference between a ‘company car’ and a ‘company car allowance’ and some of the benefits of each.
But first, let’s start with a definition of ‘company car allowance’ so that we know what we’re talking about.
Definition Of Company Car Allowance
First, let’s define a company car:
- A vehicle provided by an employer for business use by an employee.
Depending on your company car agreement, you may also be allowed to use the vehicle for private or personal journeys, paying the cost of the fuel for personal use.
Now let’s define company car allowance:
- Money is paid to an employee to cover a vehicle’s lease or purchase cost.
Company car allowances are usually added as a lump sum to your salary, and may cover a specified amount of running costs and the initial cost to buy or lease the car.
Benefits Of A Company Car
Company cars are sometimes offered to entice top talent into competitive roles, and there are many benefits for the employee, or, more frequently, they are required as the job role has an element of travel. For example, this could be to visit different company sites or to visit customers in a particular region or nationwide.
In general, company cars are among the newest models on the market, with the business taking out a lease and upgrading to newer vehicles with each renewal date.
Employees get modern, comfortable cars to enjoy, making their morning and evening commutes and any driving during their day-to-day work duties much more enjoyable and affordable – and, in many cases a key factor for the employer is that the vehicle is new, safe and well-maintained to protect the employee.
For businesses, company cars can carry a range of tax benefits and implications. It’s worth talking through your requirements with your company accountant to ensure that any vehicles are accounted for correctly.
Companies may also appreciate the option to add branding to the vehicle’s bodywork, if permitted under the lease terms, effectively creating some free advertising when your employees are out and about.
Benefits Of A Company Car Allowance
So, why offer a company car allowance and not provide a company car directly? Managing a fleet requires resource from the company in order to do this, such as a fleet manager to ensure the vehicles are taxed, serviced on time and the fleet is correctly maintained. Offering a company car allowance as an alternative takes away the requirement for the company to manage a fleet of vehicles.
It also gives the employee the freedom to choose from the latest models from their favourite manufacturer.
Here are some of the reasons why a company car allowance makes good sense s, and in many cases, it is offered as a company perk, rather than a necessity to do the job which would require a company car in most cases:
Choice
As mentioned, with a company car allowance, the employee receives a lump sum and is free to choose what car they drive.
This allows them to decide the type of car (petrol, diesel, hybrid or all-electric), the make and model, and any customisations they want to make.
When the lease expires, it’s also on the employee to decide whether to make a balancing payment to keep the car (if this is an option in their lease) or to upgrade to a newer model.
Responsibility
Freeing up resource for the employer by not having to manage a fleet, while giving employees a much wider choice on what type of car to drive and to self-manage their vehicle is becoming a preferred option for many employers.
Tax
Company cars are subject to Benefit-in-Kind tax for drivers, which can eat into the financial benefits of offering company cars to employees.
A company car allowance is treated as a taxable benefit, usually at the same rate as the employee’s salary.
However, by opting for an electric vehicle, employees can take advantage of low benefit-in-kind tax which makes the proposition particularly attractive to many company car drivers.
Company Car Optional Remuneration Arrangements
The HMRC Company Car ‘Benefit in Kind’ Calculator asks whether the vehicle is supplied via an Optional Remuneration Arrangement – this is another way of asking if the employee was asked to choose between a company car and a company car allowance.
If the employee chooses to forgo an allowance in exchange for receiving a vehicle directly, the tax is paid on the greater of the full allowance offered or the vehicle’s value.
Where the supplied company car is worth less than the offered allowance, this can mean that the Benefit in Kind calculation is higher than it would normally be.
Again, specific circumstances will always vary, but businesses should be aware of this. It may be better to choose between only offering a company car or an allowance, rather than allowing the employee to choose between the two.
Final Thoughts
As is often the case with employee benefits, the advantages of a company car vs. company car allowance are split between the perceived benefit to the employee, and the complex tax implications of making the offer at all.
In either case, business car leasing is a great way to spread the cost of a company car, both for employers and employees with a company car allowance to spend.
For employers, company car leasing reduces the hit on cash flow by creating a lower monthly expense instead of a one-off annual payment or an upfront purchase price.
For employees whose company car allowance is paid monthly, using the allowance to take out a personal leasing agreement allows you to spend that money at the same pace as it comes in. Leasing agreements, as well as having the manufacturer’s warranty, are also available with optional service, maintenance and tyres includes, so you know the vehicle will not leave you out of pocket by more than your allowance will cover, with no unexpected bills.
In the end, the final decision between a company car and a company car allowance will be based both on the cost-benefit analysis for the business and also, to an extent, on personal preference.
Both options have their advantages, and it will depend on the needs of the business and individual drivers as to which one, or a combination of both, works best for your organisation . This leaves you and your employees to focus on the fun parts, like choosing your next make, model and trim of company car.
