- What’s the difference between a company car and car allowance?
- Benefits of a company car
- Low BiK tax rates
- No depreciation costs
- No unexpected costs
- You get to drive a new car
- You won’t be tied into a financial agreement
- Disadvantages of a company car
- You may not be able to choose your vehicle
- BIK tax could be expensive
- You may need to pay Fuel Benefit
- You’ll never own the car
- Benefits of car allowance
- Freedom to choose your own vehicle
- You can decide whether to buy or lease
- A flexible cash boost
- Potential to profit if you own the car
- Disadvantages of car allowance
- Finance is your responsibility
- How much allowance you receive may vary
- Running costs are your responsibility
- Lots of miles can be expensive
- Should I choose a company car or car allowance?
If you’re an employee or an executive for a business, there may come a time when you’re offered a company car or car allowance and there are benefits to both.
- A company car can be great for those who commute lots of miles to benefit as the vehicle is paid for meaning you don’t have to worry about unexpected costs.
- Car allowance is less common but offers more flexibility as the money can be used to purchase a new set of wheels or pay its running costs.
So, what’s the difference between a company car and car allowance? What are the benefits and disadvantages of each? And which should you ultimately choose? Read this handy guide to find out everything you need to know about company cars and car allowance.
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What’s the difference between a company car and car allowance?
While both car allowance and a company car are great perks for any employee, there is a significant difference between the two. A company car is a vehicle provided by your employer for you to use, whereas car allowance is a cash sum that is added onto your annual salary for you to be able to buy or lease a car.
While in both cases you’re responsible for looking after the car, with a company car it’s your employer’s duty to handle any payments and running costs, whereas with a car allowance this would be your responsibility.
Benefits of a company car
There are a number of benefits to having a company car, from low benefit in kind (BiK) tax rates to the freedom of not being tied into any financial agreements. Here are the most important benefits of a company car.
Low BiK tax rates
BiK tax is a tax applied to employees who receive significant perks as well as their normal annual salary and will be automatically deducted from your salary by your employer.
The total tax you pay will depend on the CO2 emissions and fuel type of the vehicle, plus your income tax rate, but rest assured this is usually way cheaper than the full cost of a car.
You can even look at getting an electric car to benefit further as new tax rates have made them even cheaper, with rates of 2% for zero-emission vehicles compared to the 15-37% for petrol and diesel.
Take a look at the table below to see how much difference an electric car can make.
Vehicle CO2 emissions | Benefit in Kind Rate |
---|---|
0 g/km | 2% |
1-50 g/km (range >130 miles) | 2% |
1-50 g/km (range 70-129 miles) | 5% |
1-50 g/km (range 40-69 miles) | 8% |
1-50 g/km (range 30-39 miles) | 12% |
1-50 g/km (range <30 miles) | 14% |
No depreciation costs
As you won’t own a company car, you never have to worry about the vehicle’s depreciation (the vehicle losing value over time) which would affect PCP or lease payments and how much you’d stand to lose if you were to sell the vehicle in the future. While often overlooked this benefit could help you save money in the long term.
No unexpected costs
Typically, maintenance, servicing and insurance for the company car is all taken care of by the employer. There may even be a company car fuel benefit which will be cheaper than filling up yourself, since your employer will fill up for you and then charge you a flat rate just like the BIK tax.
You get to drive a new car
Company cars are usually updated after every 3-4 years which means you’ll always be driving one of the latest vehicles on the market. This also allows you to benefit from the latest vehicle tech while commuting.
You won’t be tied into a financial agreement
It will be the company’s responsibility to ensure the monthly payments are made on time and you will only be charged the BIK tax. As such, there isn’t a risk of being charged for defaulting on payments or any risk of getting into any financial trouble as the vehicle isn’t your financial responsibility.
Disadvantages of a company car
Not everything is rosy about having a company car though and you may want to consider some of the limitations involved if you’re given the option. Here are some points you might want to think over before making your decision.
You may not be able to choose your vehicle
Each business is different, with some having restrictions/limitations in place that may mean you won’t be able to freely choose your own vehicle. This is important to some more than others, but if you’re a driver who knows what you want then it may be that you end up disappointed with the model chosen by your employer.
BIK tax could be expensive
On the opposite side of the spectrum, your employer may choose a really nice model but in doing so cause your BIK tax rates to soar through the ceiling!
For example, if your employer has chosen a nice Lexus IS as it’s company car of choice, its CO2 emissions of 137 g/km would mean you’d have to pay around 32% BIK tax.
You may need to pay Fuel Benefit
If your employer has given you free fuel along with your company car that you make use of during your personal time, you may have to pay fuel benefit tax. Your employer may subsidise this tax, but if they don’t you will be taxed accordingly.
If you do need to pay a fuel benefit tax, the fuel benefit that you’ll need to pay is worked out by multiplying your BIK tax rate by the fixed annual fuel charge (£24,500 for the 2020/21 tax year), before finally multiplying by your tax margin.
For example, an entry-level Volkswagen Passat with CO2 emissions of 112 g/km would mean you’d have to pay around 27% BIK tax. The fuel benefit for this vehicle for the 2020/21 tax year with a standard tax margin of 20% would be £1,323.
Therefore, if your annual fuel bill is less than £1,323, you’ll be charged for fuel you’re not even using making a company car a less than ideal perk.
You’ll never own the car
If you end up leaving the business, the car will stay with the company. As a result, you will have to finance your own vehicle, see if your next employer offers a similar scheme or risk being without a car. You may also become attached or sentimental about your company car which could also be a disadvantage when it comes to giving it up.
Benefits of car allowance
Car allowance is becoming increasingly popular due to its flexibility, as employers no longer have to manage a fleet of vehicles. Instead, they can simply add a cash allowance to an employee’s salary reducing admin work and potentially saving them money. Here are the main benefits of car allowance for employees.
Freedom to choose your own vehicle
Since you’re not given a company car but instead money to sort out your own vehicle, you have the freedom to choose your own vehicle or to use your personal vehicle for business use.
It’s worth noting that your employer may set some minimum specifications for the vehicle, e.g., the number of seats, so check with them to see what is or isn’t suitable.
You can decide whether to buy or lease
As well as the freedom to choose your own vehicle, you also have the freedom to decide whether you buy or lease the vehicle. This gives you the opportunity to own a car based on the car allowance scheme if you think you will be around for a while, or to simply lease the vehicle over a shorter contract if you might leave the company in the future.
A flexible cash boost
If you already own a car and don’t want to upgrade it, you can still apply for a car allowance and use it to relieve any other financial headaches you may have, such as existing lease or finance payments and car insurance.
Potential to profit if you own the car
Using a car allowance to purchase a car could mean that you profit from it when it comes to selling it on in the future.
Disadvantages of car allowance
Just like with a company car, there are also several disadvantages that you may want to consider before deciding if car allowance is definitely for you. Here are the main things to be aware of.
Finance is your responsibility
If this is the way you decide to pay for a new car, you’ll need to have finance in your name, which comes with its own set of responsibilities. Unlike a company car which is under the company, a car financed with car allowance will be your responsibility which could lead to personal financial trouble if not managed correctly.
How much allowance you receive may vary
Since your car allowance is taxed at source, your income tax will ultimately determine how much cash allowance you’re allowed or whether you can have any at all. As a result, if you’re a higher rate taxpayer you may be better off with a company car.
Running costs are your responsibility
Unlike a company car, paying for maintenance, servicing, insurance, road tax and fuel will be your responsibility and could end up significantly reducing the car allowance amount you can put towards the vehicle purchase price.
Lots of miles can be expensive
As you’ll be using your personal vehicle for business use, you can claim back on mileage based on the number of business miles you drive, your tax rate and whether or not your employer reimburses you for mileage. This could mean that high mileage drivers are worse off since the amount you can claim back on decreases per mile after the first 10,000. Here’s an example to demonstrate what this would look like.
Let’s say you drove 20,000 business miles over the year and claimed back 10,000 miles at 45p (£4,500) and 10,000 miles at 25p (£2,500) for a total of £7,000. Since in this example your employer doesn’t reimburse you for mileage, you would only be able to claim back £1,400 if you pay basic rate tax, or £2,800 if you are a higher-rate taxpayer.
However, if your employer reimburses you at a rate of 11p per mile (£2,200), you’ll only be able to claim on the difference (£5,800), which would mean you could claim back £1,160 at the basic rate or £2,320 at the higher rate.
If your fuel costs more than what you can claim back, you’ll be out of pocket.
Should I choose a company car or car allowance?
Deciding whether or not a company or car allowance is suitable for you depends on your current financial situation, your expected mileage and your potential company car.
- If you’re in a poor financial situation, it may make more sense to choose a company car to avoid further jeopardising your financials.
- If you’re expecting to drive high mileage you may be better off choosing a more economic vehicle with car allowance or by choosing a company car and paying the minimum fuel benefit which may be lower than your annual fuel bill.
- If your potential company car is electric or low emission you may stand better off with a company car, however if your potential company car is a gas-guzzler you may benefit more from car allowance and avoiding the higher BIK tax.
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