When you require the use of a car for work, your employer may well surprise you with either a company car outright, or a car allowance. Either way, it means that your transport is effectively covered by the business you work for!
But when it comes to a company car allowance vs receiving a company car outright, which option is likely to be better for you? In this guide, we’ll break down everything you need to know about either option.
What is a company car?
Congratulations! You may have started a new job, been promoted or be about to embark on starting your own business with a vehicle. Whatever the reason, there is always a feel-good factor to picking up those keys for the first time. A company car is one you’re given by your employer – and you can use this for both work and leisure.
Do I pay for a company car?
Essentially, yes – but not as much as you would for a car outright. Some schemes will require you to pay for a company car out of your salary. This may be a slight sacrifice on your monthly wages, but essentially, you still get a car at a fraction of what you’d normally spend outright off the lot.
Otherwise, some jobs even come with company cars as added perks. You won’t notice this eating into your salary, but if you apply for a job that comes with a vehicle, you may wish to account for it as part of your total salary.
In terms of further payments, do remember that tax will also play a part in your company car scheme potential. You’ll need to pay tax on your fuel allowance in some cases, meaning you will need to check such details carefully with your employer.
What are the main benefits of a company car scheme?
If you’re considering a company car scheme, here are the main perks you might want to mull over.
Servicing and MOTs are covered
Depending on the scheme you enter into, your company car’s fleet manager will likely oversee the need for regular servicing and MOTs. This isn’t in your remit, and therefore, it’s one less stress.
You won’t have to pay for a few extra costs
Driving a company car means that many costs are catered to by the business you work for. For example, you normally won’t be expected to pay for or arrange insurance. What’s more, the company will normally take the fall for repairs and emergencies, at least in terms of cost.
You might not have to pay as much tax
Depending on the type of company car you acquire, you may only have to pay 2% tax! That’s because of a current UK scheme in place for electric company cars – which is running until 2025. You may want to take advantage if you have your heart set on joining the EV race.
What should I consider when taking on a company car?
Before leaping into a company car scheme, there are a few points you’ll likely want to consider. A big point to consider is, for example, whether or not a car allowance scheme is better for your needs (if available) – and we will cover this in a little more detail below.
Here are some points to cover with your company if taking on a company car scheme:
- Ask your line manager or the fleet manager about whether the vehicle is available for personal as well as business use.
- If the car is available for private use, can your partner be included in the insurance cover to enable them to drive it too?
- Check the insurance policy and ask the fleet manager about anything you are unsure of.
- How and when are services booked? Do you need to request a loan car during that period?
- Do you have a choice of vehicle? Usually, your position in the hierarchy of your company will determine the quality and price of the vehicle you are allocated. If you are fortunate to be able to choose a car, you should consider your role, as well as the size and comfort of your vehicle.
- If you can choose a car, how many doors will you need? Think carefully about the role the car will play in your working day and during time off.
The points above can play significantly in whether or not you drive a company car, or opt for a car allowance.
What are the drawbacks of company cars?
You won’t always get a choice of car
As mentioned above, if you accept a company car, it’s unlikely you will get to choose your vehicle unless you have particular sway.
You won’t get to keep your car
This is a big point of contention for some people, and it’s one of the biggest drawbacks – company cars can and will change over time. For example, you may get a new car every couple of years.
It’s not an issue for some people, however, it can be difficult to adjust to over time! Car allowances, however, may allow you to choose and keep the cars covered.
What is a car allowance?
So, let’s consider the difference in opting for a car allowance over choosing a company car. A car allowance, essentially, is a payment that your employer makes towards a vehicle you can use in your role.
This means that you have much more control over what you can drive. However, it can mean that you have to foot the bill on a lot more.
It’s possible that – by negotiating a contract offering a car allowance -you may be required to display some publicity, too. Of course, you will choose the colour and gearbox options, but the scheme runs much differently to getting a company car outright.
How does accepting a car allowance work?
If you accept the offer of a car allowance, you take full responsibility for insuring and maintaining the vehicle.
A car allowance relieves your employer of the practicalities of running your vehicle. By fulfilling your obligations as an employee, you’ll need to submit evidence of mileage undertaken, too.
How is car allowance paid?
Company car allowance is generally agreed at the outset of your employment or promotion. It is normally paid monthly and added to your salary. Therefore, it’s not really a cash sum or a grant as such – you get a certain amount to use each month, effectively, to pay for your mileage and other vehicle-related fees.
What is salary sacrifice?
A salary sacrifice is a slightly different take on car allowances – and in some cases, it may be more beneficial to you. If you choose this option, your contractual payment level can be adjusted to compensate you when it comes to taxation.
Effectively, the company leases you the car, and you pay for it through your salary. This is a scheme that’s appearing more and more with electric cars, so again – it may be time to start joining the EV revolution.
How much money can I get with my car allowance?
Unfortunately, this isn’t something you have much power over – it’s normally decided upon based on your position, how much you are paid, and your time with your given company.
Generally, the higher the position you hold in a company, the more money you are likely to expect as part of a car allowance.
What are the benefits of car allowances?
You get to pick the car
This is likely to be one of the biggest benefits of car allowances across the board. Company car schemes dictate to you which car you receive, and how you can use it. Car allowances, meanwhile, give you more leeway with what you can do with that credit.
You get to keep your car
Again – if you’re paying for your vehicle, you get to keep it! Simple! Rather than having to take on a new vehicle every few years, a car allowance effectively lets you choose a runaround that you’ll be using for some time.
You’re more flexible in your financing
You don’t have to buy or lease a car outright with a car allowance. If you’d prefer to take out a loan, you can. What’s more, you don’t even have to buy new, unless you really want to.
Do you pay tax on car allowance?
Yes – as it’s part of the salary you’ll receive each month, you will need to pay the standard rate of income tax and national insurance.
Your company car allowance is technically a wage increase, so this does stand to reason. Therefore, it is certainly worth accounting for before you make your final decision.
Things to consider when taking on a car allowance
As with company car schemes, there are a few points you’ll need to keep in mind before deciding on whether or not an allowance is the best possible option.
- Do your sums, and include a calculation for fuel consumption. If you are driving a thirsty, big engined car, accepting a job covering a large geographical area could mean you need a different vehicle altogether.
- Check the date the car allowance will begin and also the rate at which it is paid carefully.
- Be sure to have a list of questions you’d like to ask before you accept a car allowance – it is not always easy to back out of!
- Consider whether or not you’d like to keep the same car, or get a new model every few years – the difference will dictate which option you take!
- Be sure you know where you stand on mileage. In some cases, businesses may offer you payments for mileage you use for business purposes. These will often fall within rates set by HMRC. Otherwise, you may actually receive payments towards your private journeys – but you’ll have to pay Benefit in Kind tax on any miles you expend, so keep these figures handy.
What are the disadvantages of car allowances?
You’re responsible for fixing, repairing and checking your car
This can be a big drawback for some people! When you accept a car allowance, you accept that you will need to check your tyres, windscreen, wipers, alarms, tax payments and fluids. You’ll also need to take care of all repairs and insurance, and you’ll be responsible for any offences you may commit on the road.
There still may be some restrictions
While you’ll generally get to choose the car or vehicle you want, your company’s car allowance may stipulate that you need to choose a brand or make that fits with the fleet. This isn’t a huge deal breaker for some people, but it is still worth keeping in mind. What’s more, you may even need to have an insignia or logo on your vehicle in the form of a decal. A small price to pay, perhaps!
It’s technically more for you to deal with
Yes – a car allowance gives you tons more flexibility, but it means that you have to take more responsibility for your vehicle. The easier option, with more restrictions – is the company car. It’s clear why some people can struggle to make a firm decision!
Company car or car allowance – what’s best?
That really depends on your needs and your motoring preferences. If you’d like to receive a new car for your work every so often and would rather have your repairs and servicing taken care of, then a company car will be a good fit.
However, if you’d prefer to choose your car, to keep your vehicle and to choose how you pay for it, then a car allowance is likely to be a better fit.
That said, tax does affect both types of scheme, and what’s more, there are pros and cons to consider on both sides of the coin.
Consider your lifestyle, your business needs, and what you can feasibly afford – and what your employer demands from you in return, too! Be sure to check all of the intricacies with your employer before you sign any documents – as getting untangled from company car requests and allowance schemes will take some doing.
Regardless, receiving a company car or a car allowance are both huge perks and should be seized with both hands – providing you are happy with the terms!
by Jon Craig
I am the creator of Project Financially Free and I started this journey to both educate myself and share my insights on personal finance. I’m passionate about financial literacy and I invite you to join me on this transformative path. See more.