A company car allowance is an amount of money added to your monthly or annual salary to purchase or lease a car. A car allowance affords you more flexibility as compared to a company car since you can use the money to, for example, buy a new set of wheels and pay the vehicles running costs. There’s also no specific rule that governs the amount you receive from your employer.
However, the cash alloted in a company car allowence typically mirrors what the company would have used to lease a company car and cover the mileage of running business errands.
This guide will help you decide whether to settle for a car allowance or company car.
How Does a Company Car Allowance Work?
Once your employer adds the money to your paycheque, you can use it as you wish. If you already have a car that you can use for business purposes, then this cash is basically money in your pocket.
Keep in mind that you’re the one signing the contract, not your employer. So, you’ll take full responsibility for the car regardless of your employment status. Here are some of the things that you’ll need to cover:
- Car service costs
- Car maintenance costs
- Ministry of Transport (MOT) costs
It’s best to set aside a certain amount of the company car allowance to pay for these costs instead of using the money on the car and fuel alone.
Will You Get Taxed on Your Car Allowance?
This allowance is grouped alongside your salary for tax purposes. This means that you’ll be taxed according to your income tax bracket. Remember, this allowance can push you into the higher tax rate category or the next tax bracket in general.
Read more: Vimcar’s Company Car Tax Hub
That’s why you need to figure out whether or not that extra tax is worth the allowance for your specific needs. The good news is, with a company car allowence you won’t have to worry about the benefit in kind (BIK) tax, which is only paid by drivers of a company car.
Benefits of a Car Allowance to the Employee
Company car allowance is rapidly becoming popular due to its flexibility for employers who don’t need to manage a fleet of company vehicles anymore. Instead, they can just add a cash allowance to your salary, saving them money as well as reducing admin work.
Some of the main benefits of this allowance to employees include:
- Freedom to pick the car of your choice
- The car is yours even if you leave the company
- You can pick any finance method
- If you don’t need a car, you can use the cash for other things
- You’ll often pay a lower tax
Company Cars Vs Payments to Employees to Use Their Personal Car
Although both company cars and a grey fleet are great perks for employees, there’s a big difference between the two. Bear this in mind when deciding whether to go for a car allowance or company car. With a company car your employer can give you a car to be used for business errands and for personal use as well.
On the other hand, a grey fleet involves the use of your vehicle for business purposes. Unlike company cars, these vehicles are owned by employees and regularly used for business travel. This includes cars that are rented privately or purchased through an employee ownership scheme.
Read more: Car Salary Sacrifice Schemes Explained
When you use your car for company business, your employer gives you fuel expense or a cash allowance in return. Such vehicles fall under the employer’s responsibilities and hence become part of the grey fleet.
Grey fleet can be more beneficial and cost-effective, especially to smaller, low-mileage companies, than offering and managing company cars. For most employees, reimbursing allowances for workers who must travel is much cheaper than maintaining a fleet of company vehicles.
So, Which Option Is Right for You?
As with many business choices, your best option depends on the financial outlook, business requirements and personal circumstances. In most cases, the preferred route is the one that saves a substantial amount of money.
The factors to consider when deciding which option suits you best between car allowance or company car include:
- Car allowance amount
- Mileage necessary for work
- Existing arrangement
- Company car restrictions
- BIK rates
A company car allowance is the best alternative if you already own a vehicle, you have a specific car in mind, or you’d like to purchase an asset that you can sell later on. But if you are a higher rate taxpayer, you could end up with an amount of cash that’s lower than a company’s car value.
It’s also essential to consider your work setting. For example, if you’ll be doing a lot of private mileage, you may be better off with an allowance instead of a company car. It’s all about your personal choices and the factors that matter the most to you in the long run.
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Fleet Management Software
Vehicles that are used for business purposes should be set up with a fleet car tracking system. Besides the vehicle’s location and distance travelled, fleet management software can help you monitor car maintenance costs, fuel cost and insurance. Fleet tracking is the perfect solution for any business owner out there who wants to properly manage their fleet.
FAQs on Car Allowance Tax
It is every employee’s dream to have a company car allowance. This is why most companies that offer car allowance leave their competition by the wayside. The car allowance is added to your monthly salary by the employer. In most companies, the car allowance is equal to the amount the company would spend to lease you a company car. Having a car allowance offers the flexibility of using the money as you wish if you are not interested in buying a car or have a car already. Once a car allowance has been offered, as a car owner, there is something you have to cover for;
- Repair cost
- Insurance cover
- Car service cost
- Ministry of transport cost
- Car maintenance cost
It is important to know that this allowance is taxable and might push your tax bracket to a higher level. Therefore, It is necessary to weigh up the worthiness of the extra car allowance tax. Below are some of the FAQs concerning car allowance tax.
Can you claim 45p per mile with car allowance tax?
Yes, you can claim a 45% tax relief on your car allowance tax if you use your car to carry out the company’s business activities. Your employer will reimburse 35% per mile, and the remainder will be deducted from your taxable income.
How much is car allowance tax in the UK?
Individuals in the higher tax bracket pay a 40 per cent tax on car allowance tax. In most cases, the amount that remains after tax deductions is lower than the value of a company car.
How does car allowance work for tax purposes?
Like any other allowance, your car allowance becomes part of your monthly salary. The allowance is taxed using the standard income tax rate.
Is car allowance tax related to benefit in kind?
Yes. Benefit in kind is a tax paid by employees for receiving certain benefits on top of their salaries. The only difference is that employees with car allowance receive their allowance in cash. The two schemes are subject to taxation.
Is car allowance tax the same as salary tax?
Yes. Your car allowance is treated as additional money on top of your monthly salary. This makes your car allowance part of your salary, and you will be charged an income tax within your marginal rates. Many companies and organisations are adapting the car allowance model due to its flexibility. It also reduces challenges associated with fleet management.
Read more: View Our Full Company Car Tax Guide