How Does a Company Car Allowance Work?

Clare Parkinson

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01 May 2019

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A company car is a perk that helps recruit and retain great staff. For some, having a company vehicle is a vital part of their role.

However, providing an employee with a vehicle can present some complications. It also raises a number of questions from the employee.

In this guide, we explain the process and what you need to keep in mind for your company car policy to work effectively.

Company car vs car allowance

The first thing we need to clarify, is that there’s a difference between providing an employee with a car and the supporting allowance.

If you provide an employee with a vehicle, then you’re responsible for the repairs, MOTs and services to it.

You’ll also be liable for insurance, driving costs, and re-selling the car should the employee have no further use of it.

If you provide a car allowance to an employee, then you’re providing them with the funds to purchase their car.

As a result, the vehicle doesn’t belong to the company and the responsibility of maintenance falls to the employee.

Another consideration when pitting company car v allowance are the tax implications. A company car typically incurs much heavier tax payments than a car allowance. We’ll go into this in further detail later in the article.

It’s your choice what approach will best fit your business needs.

What is car allowance?

It’s a sum of money you add to the employee’s annual salary for the purpose of allowing them to buy or lease a vehicle.

The staff member will have to source and buy the vehicle by themselves. They’re also responsible for maintaining and insuring the car, as well as monitoring expenses.

However, it is worth noting that you can still give mileage allowance in addition to car allowance if you wish.

How does car allowance work?

Firstly, you need to decide how much you’re willing to provide to the employee in order for them to purchase a vehicle.

A recent survey found that the average car allowance in the UK is as follows:

  • £10,300 for company heads (directors & c-suite individuals).
  • £8,200 for senior managers.
  • £6,500 for middle managers.
  • £5,200 for sales representatives.
  • £4,600 for professionals.

Then, you need to include a car allowance clause in the employee’s contract. This should state how much allowance you’re providing.

Reiterate that the employee is responsible for maintenance, insurance, etc.

Once the staff member buys (or leases) a vehicle, they’ll be able to claim mileage allowance. This should cover the cost of fuel as well as wear and tear.

Is car allowance taxable?

There’s also tax to consider.

One of the main differences of giving your employees an allowance, instead of a company car, is that you take car allowance tax out of the employee’s main earnings at the normal income tax rate.

This is because you pay the allowance as part of your employee’s salary.

It’s for this reason that you shouldn’t need to use a car allowance tax calculator, as many employers often request, as you just calculate the employee’s tax as normal.

However, if you provide a company car you may need further assistance. In this instance, you can use the government’s calculator, which you can find here.

Common questions

Due to the complex nature of car allowance, and the amount of responsibilities the employee has to take on, a number of questions are likely to arise.

Here are a few of the most common:

What is a company car mileage allowance?

This usually works as a reimbursement, not as a typical ‘allowance.’ It covers the cost of fuel as well as wear and tear.

Car fuel allowance typically means you can claim over 45p tax-free as a private mileage allowance. However, rates can differ, so it’s worth referring to the HMRC’s advisory fuel rates.

Can I claim mileage if I get a car allowance?

This is a common question from employees—and the answer is, “Yes!”  You should outline your mileage policies prior to agreeing to give the employee either company car fuel allowance, or just an allowance to purchase a vehicle.

What is the car mileage allowance for 2019?

Currently, private mileage for cars and vans is 45 per mile, up to 10,000 miles, and 25p per mile, over 10,000 miles.

The mileage for motorcycles, bikes, and other vehicles varies, again refer to the HMRC advisory fuel rates.

How does company car allowance work?

It’s a sum of money to allow an employee to purchase a vehicle, which they must then maintain.  

As a business, you should include your allowance entitlement in your contract, as well as the staff member’s responsibilities to their vehicle.

You should receive this allowance upon employment and select an appropriate vehicle of your choice.

Do you get taxed on car allowance?

Yes, at your regular income tax rate.  A company car (not allowance) tax generally incurs much higher tax costs than an allowance.

Is car allowance part of my salary?

Again, this is another common employee question. The allowance gets added to their annual earnings. If you’re deducting allowance from their annual earnings, then this is incorrect.

Still have questions?

If you need further advice about car allowance in the UK, speak to one of our expert advisers 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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