The Employer’s Guide to Company Car Allowance

4 September 2023

The jobs market is growing ever more competitive, and employers are spending more time considering the perks they offer employees. Such incentives can help retain current team members, and entice prospective employees.

Among the most popular schemes is the company car. This perk is an exciting way to attract talent, as it saves employees on transport costs when working.

However, the concept of a company car allowance is becoming a popular alternative to using a company car.  But which is better from a business perspective?

In this guide, we’ll take a closer look at company car allowance, explain how it works, the tax implications and more.

WHAT IS COMPANY CAR ALLOWANCE?

Company car allowance is a scheme for employers. It allows them to provide their employees with a financial incentive, instead of a company owned car.

A company car allowance can be added to salaries:

  • monthly
  • quarterly

The allowance is provided by employers to employees to help cover the cost of using their own cars as part of their job. It can also help cover the cost of buying or leasing a new car if it’s going to be used for work.

It’s an alternative to providing a company car, though it can also be used to help cover the costs of running the car.

A company car allowance covers costs such as:

  • fuel
  • parking

Company car allowance policies mean that eligible employees can:

  • sell their car when they like.
  • choose the make and model.
  • keep the car if they decide to leave their company.

HOW DOES COMPANY CAR ALLOWANCE WORK?

If you decide to offer a company car allowance as an incentive, you need to calculate a reasonable allowance per employee. Then, you would pay the allowance on top of your employees’ salaries, either monthly or quarterly. Or you could make a bulk annual payment.

You would need to state the company car allowance entitlement in the contracts of your employees. And you’d also need to make clear their full responsibilities for the vehicle.

HOW TO BUILD A COMPANY CAR ALLOWANCE POLICY

Employers who decide on company car allowance schemes need to ensure:

  • an employee using the scheme has a car that is in line with your company’s principles (consider providing a list of prohibited features).
  • the vehicles adhere to safety regulations.
  • state that maintenance of the car is the responsibility of your employee.
  • you keep a copy of your employees’ driving license on file.

Consider helping your employees to understand how they can fulfill your criteria by inserting conditions into their contract, based on their role and how much they need to travel. For example, working from home may be more common these days, but salespeople may still need to travel more than customer support employees.

Although car allowance takes responsibility for vehicle ownership away from employers, their safety is still your responsibility if they are travelling as part of their job role. So, it’s important to provide written guidance on how to use the vehicle safely, to reduce the risk of damage or harm to drivers and any passengers.

Also, you might want to think about including a policy clause as protection, should an employee in the scheme change their role.

For advice on HR advisory services we can offer, get in touch today.

DO YOU PAY TAX ON COMPANY CAR ALLOWANCE?

Yes, a company car tax allowance is taxable. This is one of the main differences between an allowance and providing a company car. Company car allowance is grouped together with an employee’s salary for tax purposes. So, your employees’ pay slips would show tax contributions deducted from their salaries inclusive of the allowance, not before it gets added.

This means that employees could potentially be pushed into a higher tax bracket. So, you should consider making this clear to employees if they’re thinking about signing up.

DO YOU PAY NATIONAL INSURANCE CONTRIBUTIONS ON PAID CAR ALLOWANCE?

National Insurance (NI) is applied to most types of income – including company car allowances. So as an employer, you’re liable to pay National Insurance contributions on any car allowance you pay out.

However, recently HMRC lost two tax tribunal cases, which may force them to refund employers millions of pounds after wrongly refusing tax relief from NI payments paid on car allowances.

Get in touch with us for the latest news on national insurance contributions towards car allowances.

WHAT IS THE AVERAGE COMPANY CAR ALLOWANCE?

The average company car allowance varies on several factors, including:

  • how often employees use their cars for work.
  • the job position of the employee.
  • average car maintenance costs in the local area.

Employers pay employees between roughly £300 and £800 monthly. However, this figure can rise as high as £1,400 for employees who spend lots of time on the road.

HOW DOES COMPANY CAR ALLOWANCE WORK WITH ELECTRIC CARS?

If you’re an employer that uses company cars as a perk, you can benefit from paying lower car tax on electric cars. This is because HMRC class company cars as a benefit in kind (BIK) – and offer lower rates as an incentive to help their bid to phase out petrol and diesel cars by 2030.

However, if you offer a company car allowance instead, you won’t benefit from lower tax.

If you want your company to reduce its carbon footprint, you could consider offering a slightly higher company car allowance as an incentive for any employees who can prove they’re driving an electric or hybrid car.

COMPANY CAR ALLOWANCE OR COMPANY CARS?

From an employer perspective, offering a company car allowance rather than a company car means you don’t have to worry about unexpected maintenance bills. And you don’t have to worry about depreciation either.

However, passing the costs of maintaining a car onto employees means they may need increases in their allowances as the cost of living rises.

If you’re not sure whether to use company vehicles or company car allowance as a perk, our tax team can help you with our expert advice. Give us a call on 0330 162 4389.

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