Company car or car allowance – which should your business offer?
Offering key employees a company car can be a sure way to attract and retain them. But there are two main options available for your business – so which is best? Tom Butcher indicates the way to go.
Being able to woo potential employees with a company car puts you in a very strong position as an employer. Cars are a major expense for anyone, especially if they have a long commute, so the offer of a car represents the equivalent of a healthy pay rise – without costing the employer as much.
There are two main ways to offer this kind of employee benefit: an actual company car, or a company car allowance. But in a head-to-head, which offer comes out on top? Put your seatbelt on and let’s get started.
What is a company car?
First let’s clear up just what a company car actually is.
A company car is a vehicle that’s given to you to use for business purposes by your employer. Although the employer is the legal owner of the car and is responsible for maintaining it, you can usually use the car for personal use too (though this may depend on the policy of your company).
What is a company car allowance?
So what’s the difference between a company car and a company car allowance? A company car allowance is a cash payment that enables you to source your own car for business purposes. Some companies don’t even require you to spend the money on getting a car if you don’t want to, as long as you have a vehicle that you’re happy to use for business reasons. Again, specific company policies will apply.
Which is best for companies?
Which of these options is best for you as the employer? There isn’t really a clear-cut answer. Some businesses will give staff the option to choose between these schemes, though offering both will increase the administrative burden and costs, since you’ll have two separate processes in play. On the other hand, having both schemes on offer tends to be very popular with employees, so it may be worth the extra expense.
Offering a company car scheme
If you’re thinking of offering any kind of company car scheme for your employees, here are the implications you need to think about.
Finance and tax
Company car: A fleet of company cars is a significant asset that you’ll have to source at the most competitive rates. That said, if your business leases a substantial amount of vehicles from a broker, it might benefit from more leverage and bargaining power in any price negotiations. The business is usually responsible for paying any tax and National Insurance (NI) due on the benefit, along with benefit-in-kind insurance.
Company car allowance: You’ll probably find that you pay slightly more per employee when offering a company car allowance, but your employee will pay the tax and NI contributions. You’ll normally have to offer approved mileage allowance payments with this type of benefit – usually 45p/mile for the first 10,000 p/a and 25p/mile afterwards.
Maintenance and insurance
Company car: When it comes to maintenance of a company car, the business itself is responsible for all types of maintenance and repairs, as well as insuring the cars and providing driver details. The company has complete control over the type of vehicles that it chooses for the scheme.
Company car allowance: The car is owned directly by the employee, so they must cover all the insurance, maintenance, repair and roadside cover costs.
The company does however have a duty of care, so it must ensure the workplace safety of any vehicle that is used by an employee. The company also has a responsibility to check that the vehicle is appropriate for use as a business vehicle (no monster trucks, I’m afraid!).
Company car: The main admin tasks will be managing vehicle maintenance, maintaining insurance policies and sorting out repairs. The driver of each vehicle claims back the fuel costs themselves.
Company car allowance: The admin here involves collecting driver details and insurance details, calculating the individual allowance for each employee, and managing the company car allowance policy (or policies) across the business.
Company car considerations for employees
If you’re still trying to decide which to offer, it may help to look at it from the employee’s point of view. Here are the issues for employees to consider.
Finance and tax
Company car: There are no upfront costs for an employee when it comes to a company car. They’ll have to pay the benefit-in-kind (BIK) tax on the car and this will depend on the vehicle given. The employee won’t own the car, but will be the registered keeper. That means that if they change jobs, they’ll have to give the car back.
Company car allowance: Here the employee becomes the legal owner of the car and so is responsible for it financially– even if they leave your employment. This means they can sell the car if they wish and pocket the money. If the employee is buying a new car, they’ll have to pay the most of the overall cost themselves upfront (as the allowance is unlikely to cover the full cost). They can also put the money towards a car they already own, using it to pay for servicing, recovery and repair costs for instance. Tax and NI is payable on the company car allowance, just as it is on salary.
Maintenance and insurance
Company car: The company covers all of the insurance costs of the vehicle – this is particularly attractive to drivers under the age of 25 who are likely to face higher premiums. The company also pays for MOT, tax and servicing.
Company car allowance: The employee is responsible for sorting out insurance, servicing and repairs. They must also add ‘business usage’ to the insurance policy, which can increase premiums.
Company car: The employee can’t pick any car they want, but must choose from a pre-approved list. Personal use may also be restricted by the employer (though you can allow it if you wish). Employees need to keep their fuel receipts in order to claim these back on expenses.
Company car allowance: Employees will have a number of admin tasks to carry out relating to any legal, financial and maintenance obligations. They also face the hassle of recording and claiming mileage costs.
Which is right for you?
Broadly speaking, a standard company car policy reduces the cost on the employee, but increases the cost on the company. Conversely, a company car allowance reduces cost for the company, but could work out more expensive for the employee in the long run. Against that, the car allowance may have more appeal for employees, being more versatile, so they may decide it is worth the extra cost.
Ultimately, which one you choose as the employer will depend on a range of factors, such as how many employees you have and how much business-related driving you expect them to do. Whichever you choose, this summary should help you weigh up your options.
News Source: Unbiased