Cash Allowance or Company Car?
Company Car or Cash Allowance
Many businesses offer cash allowances either alongside or instead of a company car and given the recent significant increases in company car tax more and more employees are exercising their option and cashing out, our Fleet Consultancy Experts have summarised the factors both businesses and employees need to consider when making their decision.
Business Perspective
When setting cash allowances businesses need to decide what their strategy is and with the strategy clearly set should consider the following when developing your cash alternative:
Cash Allowance Level
- Encourage company car take up - Many businesses want to keep drivers in company cars and will set cash allowances accordingly
- Encourage cash take up - Increasingly popular solution given the rise in company car benefit in kind tax
- Remaining cost neutral irrespective of the employee's decision - This effectively locks down the company's costs but still gives the employees choice
- Mileage reimbursement decision - See below - The method chosen to reimburse business mileage will impact the level of allowance you should set
Mileage Reimbursement
- Use Approved Mileage Allowance Payments (AMAP) - These tax free payments are used to reimburse business mileage undertaken in an employee's own car and are 45p per mile for the first 10,000 miles in a tax year and 25p per mile for each mile over 10,000, whilst the tax free status is attractive it can encourage unnecessary business miles
- Use advisory fuel rates - These rates change regularly but are based on covering the cost of the fuel used and vary by fuel type and engine size, electric vehicle rates are now included at 4p per mile
- Actual cost of fuel via fuel card - Use a fuel car to cover business miles
- Private mileage taxation - Few company's offer this now due to the high tax burden on the employee
Vehicle Type & Usage
- Do employees need specific vehicles to undertake their role? - Could an employee source a suitable vehicle personally
- Business miles undertaken - The higher the business mileage the higher the cost, more scope for tax free AMAP payments but the employee's personal vehicle costs will be higher
- Personal mileage - This impacts the total cost of the company car
- Vehicle cost - This impacts lease rate and tax costs
- Vehicle Fuel Type - This impacts fuel and tax costs
- Vehicle C02 rating - This impacts tax costs
- Vehicle Miles Per Gallon (MPG) performance - Can be important depending on business mileage reimbursement rates used
- Contract Length - How long are the vehicles kept for impacts total costs
Taxation
- Corporation Tax - Rate impacts total business costs
- VAT - 50% of Vat on capital element of the business lease is recoverable for many businesses
- Income Tax - Drivers income tax position influences their net spending power and company car tax
- Employers National Insurance - Payable by the company on the company car benefit and on any cash allowance
Risk Management
- Company Car - This gives the company visibility and control of the vehicle being used to ensure its fit for purpose, maintained and repaired
- Cash Allowance - The company loses visibility of the actual car used but still has an obligation to ensure any vehicle used for business mileage is fit for purpose
- Driving licence - Companies should check employee's licences for endorsements irrespective of whether the employee chooses cash or car
Employee Perspective
You need to decide if you want a car equivalent to the company car or something less/more expensive, having cash gives you more choice but you should consider all of the following before you make a decision:
Cash Allowance Level & Mileage Reimbursement
- This will be set for you by the company its likely to be taxable but not pensionable earnings
- Business mileage reimbursement may be at cost or via AMAP payments
- Your net spend after tax will need to cover sourcing a vehicle, insuring, maintaining and repairing
Vehicle Type & Usage
- The vehicle you source personally needs to be compliant with your company policy and fit for business purposes
- Business miles undertaken - Whilst the cost of fuel will be paid by the company these extra miles will increase the cost of your personal vehicle
Taxation
- Company Car Tax - Use a company car tax calculator to ensure you are basing your decision on the right costs given the complexity
- Income Tax - Your company car benefit in kind and cash allowance are subject to income tax
- Employees National Insurance - You pay this on your cash allowance but not on a company car benefit in kind
Wrapping Up
With the numbers involved being typically ~£7,500 per employee per year the right decision is crucial to both the company and the employee, our team of Fleet Consultancy team can quickly model the answer based on your individual requirements whether you are the employer or the employee, if you would like us to take a look at your decision, Lets Talk!