Providing employees with the means to drive a new vehicle is a great way to boost your business’s image and staff morale. However, it can be tricky deciding which type of car scheme makes the most sense for your business. This article will discuss two of the most common methods businesses use to provide vehicles to employees: a car allowance and a company car scheme.
Which is right for your company — a car allowance or a company car scheme? Let’s review the benefits and drawbacks of each.
What Is a Company Car Scheme?
In a company car scheme, a business provides vehicles to individual employees. The vehicles can be leased or purchased by the employer, but either way they belong to the employer and not the employee.
A company car may be used for business or personal reasons, but the mileage must be recorded separately for tax and legal reasons. Note that maintenance and repairs on company cars are typically paid for by the employer.
Benefits of a Company Car Scheme v.s. Car Allowence
There are many benefits to a company car scheme for employers. Some of the primary reasons to consider company cars include:
- NIC contributions — If an employer provides a company car as part of a “salary sacrifice scheme,” it can reduce their National Insurance Contribution obligations.
- Recruitment and reputation — A company car scheme may be an appealing perk to potential employees. They can boost an employer’s image and help with recruiting and retaining employees.
- Sustainability — Employers have control over which cars may be driven by their employees. By providing low-emission vehicles, companies can reduce their carbon footprint.
- Flexibility — Company cars give employees more flexibility, which is especially great for those who travel between job sites for work or those with children.
Before Establishing a Company Car Scheme Get a Beginners Guide to Fleet Taxes:
Drawbacks of a Company Car Scheme
Although a company car scheme can benefit your business in a multitude of ways, there are also some drawbacks.
- Maintenance and repair — Employers are responsible for paying maintenance and repair fees on company cars.
- BIK Tax — Benefit in Kind tax is applied to non-cash company benefits and perks, like company cars. Depending on the fuel type and CO2 emissions of the car, employees may be subject to a higher tax rate.
- Car Fuel Benefit — If a company car scheme includes fuel, then employees will be taxed on that as well.
- Total ownership — In general, businesses looking to implement a company car scheme should be aware that they own the vehicles and are therefore responsible for them. You must be prepared to oversee a company car’s entire life cycle.
What Is a Car Allowance?
A company car allowance is a set amount of money that’s added to an employee’s monthly or annual salary to purchase or lease a car. There’s no specific rule that states how much money a business may give to an employee as a car allowance, but the allowance typically reflects what it would have paid to lease and finance a company car itself.
Benefits of a Car Allowance v.s. Company Car
A few reasons why a company car allowance may make sense for your business are:
- Car choice — Unlike a company car scheme, employees have the freedom to choose whatever car they’d like with the provided allowance.
- Deposit the cash — If an employee already has a car they can use for business purposes, the allowance is essentially money in their pocket.
- Flexible financing — Employees can finance their vehicle of choice with whatever method works best for their budget.
- Employee ownership — Employees can also keep the car even if they leave the company.
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Drawbacks of a Car Allowance
As with any car scheme, there are a few drawbacks businesses should be aware of.
- Differing allowance amounts — An employee’s income tax will determine how much money they can receive as a car allowance. Thus, an employee who pays a higher tax rate may not benefit from a car allowance.
- Maintenance and repairs — Because the car belongs to the employee, they’re responsible for maintenance and repair costs. This will decrease how much of the allowance they can actually use for the initial cost of the car.
- Mileage costs — Employees will be able to claim back their business miles, but it will depend on their tax rates, the number of miles driven, and whether or not your business reimburses their mileage. If fuel costs more than what employees can claim back, it’s their loss.
Car Allowance or Company Car?
Is a car allowance or a company car scheme better for your business? Ultimately it’s your call. You’ll need to consider what vehicles you could realistically provide and maintain in a company car scheme, how many miles your employees will be driving, BIK rates and any existing arrangements within your business.
If an employee already owns a vehicle they can use for business use, a company car allowance would benefit them more. However, if the employee is a higher rate tax payer, they could wind up with a car allowance that’s lower than the value of the car they’d like to buy.
If going the company car route, businesses need to be prepared to pay for the insurance, maintenance and repairs of each vehicle. Employees won’t have a choice in which vehicle they drive, but your business can opt for greener vehicles to lower their BIK tax rates.
No matter if your business opts for a car allowance or a company car scheme, you should be tracking your vehicles.
Vimcar’s Fleet Geo can be used to track business mileage and can be switched to Private Mode whenever an employee is driving for personal reasons. Contact Vimcar today to learn how Fleet Geo will improve your company car scheme.