Company Car vs Car Allowance

Years ago, a company car was seen as a massive incentive towards taking a new job. However, recently many employers have preferred to offer a car allowance which could prove more financially beneficial to both you and the firm. So when presented with the two options – a company car or a car allowance – which should you choose? This guide will examine the pros and cons of both.

Why choose a company car?

The company car system is long established in the UK. When you join a company, your new employer may offer you a company car as a perk – this means that you will drive a vehicle that the company owns.

Let’s look at the advantages of taking a company car:

  • For the most part, the firm will cover the vast majority of your driving costs – many companies even offer a private fuel benefit.
  • Repairs will usually be covered.
  • You do not have to take out an expensive loan and pay high amounts of interest.
  • Depreciation is no longer your concern. It’s well-known that the value of vehicles drop quickly from their original list price – even a car that holds its value well will lose around 50% of its worth within three years. As you don’t own the car you don’t have to worry about this loss of re-sale value. Most company car owners have car leasing agreements which allow them to return the car to the leasing company at the end of a contractual period (normally two-three years) and then take out leases on new vehicles. This means that the company car owners can avoid expensive maintenance costs as the car shows more wear and tear.

The main disadvantage to company cars is that car owners can now be heavily taxed based on the type of vehicle they drive, as the following section will explain.

What’s changed about the company car system?

Prior to April 2002, company car owners paid tax based on the number of business miles they drove each year. Now however, the system is calculated based on the quantity of carbon dioxide emissions from each vehicle – fewer emissions mean less tax.

As larger vehicles are typically used by firms to carry goods, they are subject to high taxation as traditionally larger vehicles pollute more.

How do you calculate your tax level?

To work out the level at which you will be taxed you must take into consideration a number of factors:

  • Your highest rate of income tax – your tax rate is based on your earnings.
  • The retail price of your car and additional extras worth more than £100. The upper tax limit for a vehicle and accessories is £80,000 – anything above that is for tax purposes priced at £80,000. If you have contributed your own cash to buying the company car, the list price should be reduced accordingly.
  • The CO2 rate of the vehicle – this can be found in the car’s V5 document. A 15% charge applies to cars emitting less than 145g/km. This amount increases by 1% for every five grams/km thereafter – up a maximum of 35% for those with emissions in excess of 240g/km.
  • Fuel type and rate – Though diesel cars generally give out lower levels of CO2 and are usually favoured by company car owners bear in mind that a diesel car with the same CO2 level as a petrol car will pay a higher level of tax than its petroleum equivalent because of higher toxic emissions. This is unless it meets the Euro IV emission standards introduced in 2005.
  • Fuel benefits – If you are given free fuel by your employer, you will still face a tax charge and the employer could be liable for NI contributions.

To help reduce the tax level of your company car, the solution is to get a more environmentally friendly vehicle. Smaller cars and particularly hybrid cars and electric vehicles are featured in lower tax bands – with the most environmentally friendly cars facing no tax charges as well as being exempt from congestion charges. The Inland Revenue publishes a table listing the tax bands for vehicles – bear in mind these can change after each budget.

An alternative is to use an LPG converter on your vehicle to reduce emissions – of course this can only be carried out if your company owns the vehicle, and not if they are leasing a car.

What about a car allowance?

Many people now prefer a car cash allowance rather than a company car – this means driving your own vehicle and receiving a mileage based cash incentive from your employer. This is known as the Inland Revenue Authorised Mileage Rate (IRAMR).

The good news is that these allowances are tax-free. There are two rates based on the fact that some driving costs are variable (such as fuel) and others are fixed (insurance, tax, etc). The payments are 40p/mile for the first 10,000 miles and 25p/mile thereafter. There is no size restriction – these benefits apply whether you drive a small car or a van.

Which is right for you – a company car or a car allowance?

As with most aspects of driving this choice depends on your personal circumstances.

The key to calculating the most cost-effective route is to think about the monthly car allowance being offered to you. Once you have done this deduct any National Insurance contributions and tax, and add in the tax saving of not driving a company car.

Compare this to driving a company car and think about whether the money you have left will allow you to cover your remaining motoring costs including insurance, repairs, depreciation. Also factor in any fuel benefit offered on your company car.

The option that saves you the most money will usually be the preferred route for most. However, look beyond cash too and consider whether you want to have the security of owning your own vehicle or whether you prefer to drive a company car to avoid the expense of depreciation, etc.

It’s all about personal choice and which factors matter the most to you – hopefully you now feel well-equipped to make an informed choice.