Car Allowance vs Company Car: What are the Differences?

Clare Parkinson

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30 Apr 2019

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Providing an employee with a vehicle can be a reward for long or exceptional service, as well as a perk for recruitment purposes.

However you choose to use the option, one thing to consider is whether you should provide your employee with a company car or allowance. 

This article explores the options and which one will work best for your business.

Company car vs car allowance

There’s a significant difference between the options. In summary, they work as follows:

  • An allowance is a sum of money that allows a staff member to purchase a vehicle.
  • A company car is a vehicle you purchase and maintain on behalf of the employee.

If you're considering which option is best, company car versus car allowance, it’s worth knowing the pros and cons of these options.

Company car benefits

There are a number of reasons why you might choose to provide your employee with a vehicle, rather than cash to buy one.

Firstly, you own the vehicle. That means you can repurpose it if the member of staff leaves the business.

As the car belongs to you, you can also stop the employee from modifying the vehicle without your permission.

Depending on the type of car model you choose, you may have control over the tax bill. With that in mind, you can pick and choose from the range available to suit your business' needs. 

Take a look at car allowance benefits here

Company car options in the UK

Unfortunately, you’re fairly limited when it comes to a company car. Not in the selection of the vehicle, but the means of financing and purchasing it.

There’s a direct cost to purchasing a company car in the form of Class 1A National Insurance contributions, or NIC. This cost relates to CO₂ emissions.

For this reason, environmentally friendly vehicles are a good option as they allow you to offset a greater proportion of the value of the car against the tax bill.

You base your contribution on the vehicle’s BIK tax band, and its P11D value, which is currently at a rate of 13.8%.

Take all of this into account when deciding what vehicle to purchase for your employee.

When weighing up whether to provide your employee with a company car or cash, having control of payments is a positive argument in favour of the first option.

Company car vs car allowance calculator

Are there any tools that weigh up the pros and cons to provide your best choice? Unfortunately, as each situation is unique, there’s no definitive right or wrong answer.

When deciding whether to provide your employees with a company car or cash allowance, there are several points to weigh up:

  1. Do you want to retain the vehicle when the employee leaves?
  2. Do you prefer to have control over the maintenance of the vehicle?
  3. Do you want to lock yourself into a contract?

In the long-run, providing a car allowance is cheaper, as it puts the onus on the employee to maintain the vehicle.

But it could turn out to be a wasted investment if the staff member then leaves your business and takes the car with them.

As a result, providing a company car can be the more expensive option—but the safer one.

Still struggling to decide?

If you’re weighing up your options but need further help, speak to a Croner expert on 01455 858 132.

About the Author

Clare Parkinson has over 20 years’ experience in the Croner Reward business. As Business Manager, Clare leads a team of Reward Consultants who specialise in the delivery of pay and grading related advice, including tailored pay benchmarking and gender pay reports.

Over the years, Clare has contributed to various industry publications on topics such as gender pay, executive remuneration and market pay trends.

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