Company Car or Car Allowance - Which is the Better Choice?

Company Car or Car Allowance - Which is the Better Choice?

Once upon a time, being given a company car was somewhat of a status symbol, a sign that you had progressed to the higher levels within your business.

However, since the rules around BIK Tax were changed in 2002 to allow a car’s CO2 emissions to be taken into account when calculating company car tax, many of the more luxurious models became unavailable to company car drivers.

This saw many companies moving to offer their employees a cash allowance instead.

However, what is the better option, a company car or a cash allowance? To decide that we need to have a look at both options in detail.

What are the benefits of a company car?

As well as a company car being a perceived symbol of achievement or status at work, there are other advantages of having a company car:-

- The car is owned by the company, so they take care of a lot of the costs, such as maintenance and servicing.

- The company will also usually take care of insurance and repairs as well.

- You, the employee, get a new car on a regular basis.

- You also don’t have to worry about trying to sell the car at the end of your term, that’s all dealt with by the company.

- Higher-spec models are usually available for less money than you would expect.

- Business Contract Hire deals mean that it might cost you less to lease through your business than it would to lease privately with a PCH deal.

Offering a company car doesn’t just offer incentives to employees either, there are benefits to the company as well:-

- Research has shown that offering a company car scheme to employees attracts the best candidates to your business, improves staff morale and helps to keep your best employees at your company.

- Businesses can also claim between 50% and 100% of the VAT back on BCH deals.

man holding key

So there are some advantages to having a company car, but what about the disadvantages? As with anything, there are downsides too: -

- Due to the way that BIK Tax is calculated, less efficient models can be quite expensive putting some more executive or sports cars out of financial reach.

- Your employer may have a contract with a particular manufacturer, meaning that you may have a limited choice of cars.

- You usually won’t have the option to purchase the car outright.

From a business perspective: -

- Many of your employees will use their company car for personal use as well, meaning that there’s a greater risk of accidental damage. This increases the risk to your company.

- If employees are using their company car for personal use as well, you will ideally want to track this as it will affect whether or not you can claim back the VAT.

So as you can see there are pros and cons for having a company car. The alternative is giving employees a car allowance.

How does a car allowance work?

A car allowance is an amount of money that’s given to an employee instead of a company car. It is added to their annual wage and allows them to avoid paying company car tax.

As with running a company car, there are pros and cons to car allowances, some of which are as follows: -

- As an employee, you would no longer be liable to pay company car tax. This is especially beneficial if you intend on using the car for personal use as well as for business purposes.

- You are not tied down to a particular make and model of car; the choice is completely yours.

- You can choose the best way to finance your car, whether that be PCP, PCH or HP.

- You can get a really good deal on a car if you choose one with low or zero emissions, good fuel economy, and a low list price.

- Depending on the finance package you choose, there may be the option to purchase the car outright, leaving you with an asset.

- Some finance packages include all the servicing, maintenance and other benefits such as roadside assistance for one payment, making it much easier to budget for the running of your car.

car allowance coins

Of course, there are also downsides to receiving a car allowance rather than a company car, such as: -

- You, the employee, won’t pay company car tax but you will pay more income tax and higher National Insurance contributions based on your increased salary.

- You will be completely responsible for the car’s upkeep. This means that you will have to have the car regularly serviced, maintained and repaired at your own cost.

- Insurance will not be included, so you’ll have to budget for that too.

- You will possibly be tied into a financial contract, which you will remain tied to even if you leave your company.

Businesses should also be aware that, even if they offer a car allowance, they will still have a duty of care to their employees when using their vehicles for business purposes. This can put companies in a difficult position whereby they would ideally like to know if the employee has properly maintained their vehicle, or whether it has been serviced in accordance with the manufacturer’s service schedule.

Is it better to use a company car scheme or have a car allowance?

There are pros and cons to both but it’s our opinion that certainly from an employee’s point of view, a company car scheme is the better option.

Although you would pay company car tax and you may have a limited number of vehicles from which to choose, you would still likely be better off having a company car than taking a car allowance.

Firstly, the majority of the running costs are covered by the company. Secondly, you will receive a new car on a regular basis and will not have to worry about selling the car on. Thirdly, you will likely be able to choose a better make and model than you would with a car allowance.

You can browse our best business lease deals, find out more about BIK Tax or have a look at our list of the best company cars for 2017.