Cash Allowance or Company Car?

29th Nov 2018

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