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If you’re an employee being offered a car allowance, you may be wondering ‘what’s involved?’ Well this guide explains everything you need to know, including your responsibilities, the benefits and consideration points, as well as up-to-date information on how a car allowance will impact you financially.
When choosing between a company car and a car allowance, cost, along with any personal priorities and preferences you may have, will obviously play a significant part in your decision-making. Central to your thinking should be consideration of the following three factors:
‘Benefit in kind’ or BIK is a tax placed on employees who receive personal benefits or perks (such as a company car) from their employer on top of their salary.
BIK tax payable is usually deducted from the employee’s monthly salary/wages. If you would only ever use a company car for business purposes, then there will be no BIK tax for you to pay on it. If, however, you would use it to any degree for private (i.e. personal) use, you will have to pay BIK on it.
The BIK rate payable by employees can be calculated by multiplying the figure for the car’s emissions level and engine type by the vehicle’s P11d value. This figure is then multiplied by the employee’s personal tax bracket (e.g. 20%, 40%), to give the amount that will be deducted from the employee’s salary or wages each month, e.g.:
30% (our theoretical vehicle’s emissions band and engine type) x the P11d value. Then multiply this figure x 20% (our theoretical employee’s tax bracket) to give the amount payable in BIK tax by the employee.
Compared with the company car option, taxation on a car allowance is very simple as no company car tax or BIK is payable by employees on a car allowance. The allowance is simply treated as employee personal taxable income and taxed at your usual tax rate as part of your income.
If you’re a high rate taxpayer, e.g. 40%, you’ll pay 40% on the allowance, so consider whether the amount of salary you’ll be left with will post-tax will be enough for you to pay for any other out-of-pocket vehicle expenses you’ll also incur.
Whatever rate of tax you pay, once you know what the allowance amount will be post-tax, compare this with how much you’d be left with post-tax if you opted for the company car scheme. Consider whether you might be able to get a better calibre of car if you took the car allowance and used it to lease a vehicle (instead of taking the company car).
If you are offered the choice of cash or car, you will taxed on the greater of the two benefits, regardless of which option you select, unless the vehicle you drive emits less than 75 g/km of CO2.
When calculating the total cost to you of each option (i.e. a company car and a car allowance) keep in mind any fuel allowance which you may also be offered and how this will impact you financially. To learn more about how to calculate what this additional benefit will cost you, read our employee guide to fuel allowance.
Once you understand the cost aspect, next consider vehicle type. Firstly, make sure you understand the full details of any company car being offered to you, including make, model, age, safety rating, engine type, fuel economy, whether it’s manual or automatic and the colour etc. If the company car was leased, what restrictions would your company place on vehicle type?
Then find out what (if any) constraints your company would place on how you’d spend a potential car allowance, ask about restrictions on make, model, engine type, vehicle style, age and safety rating. Also ask about any restrictions on who can drive the car, passengers that can be carried and their age, as this may restrict the usefulness of a company car and/or a car allowance for you and your family circumstances.
If you’re not happy with the company car on offer but also find your employer would restrict your choice of vehicle should you take the car allowance, then the factors of cost-effectiveness (see factor 1) and admin responsibility (factor 3) may sway you one way or the other.
| Company Car | Car Allowance | |
|---|---|---|
| Benefits | • Access to a car without having to personally fund it • Servicing, maintenance, repairs are usually included in the offer • A fuel allowance may be provided • Your employer is responsible for almost all vehicle admin • No ownership problems or risks (depreciation, selling etc.) • If leased, you may have more choice in the company car that you drive |
• You receive an increase in taxable salary or wages • You can choose whether to lease, buy or else to fund your current car • Your employer may place fewer restrictions on the vehicle you choose (with a company car the vehicle is often pre-designated) • If you leave the business, so long as you can afford it you can keep the car (unlike with the company car option) |
| Considerations and drawbacks | • You may have no say in or may not like the car on offer • If leasing, your employer may still restrict choice of car • If used for any private journeys, you will pay BIK tax on it • High value, high emissions cars and certain engine types will increase your BIK tax payable • Your employer may or may not include insurance, if it doesn’t, you will need to arrange and pay for this yourself • Only authorised, insured drivers are permitted to drive the car • You must comply with company policy on passengers (including any passenger age restrictions) • You will pay car fuel tax benefit tax every month if an allowance is given for private fuel plus, you’ll also have to keep a journey logbook |
• Your employer’s car policy may restrict the car you drive and also it’s use • You will be responsible for all admin (unless you lease the vehicle) • You will need to arrange and pay for car insurance yourself • You will pay car fuel tax benefit tax every month if an allowance is given for private fuel plus, you will also have to keep a logbook of journeys • If you receive a fuel allowance, you will need to keep a logbook |
If you'd like to speak with our friendly team about business vehicle leasing, simply call 0118 920 5130 or email us at: enquiries@selectcarleasing.co.uk
If you're thinking about business car leasing, we have a collection of informative guides on all aspects of business leasing to make the process as simple as possible.
If you’re an employee being offered a company car or van, then congratulations because it can be a great practical benefit. However, before you say ‘yes’, make sure you take the time to understand what it means for you, your finances and responsibilities, so read on.
This easy-to-read, essential guide to company car tax for employees explains not only what company car tax and benefit in kind (BIK) are, but also how they’re calculated and what employees can do to help minimise the amount payable.
If you’re an employee being offered a car allowance, you may be wondering ‘what’s involved?’ Well this guide explains everything you need to know, including your responsibilities, the benefits and consideration points, as well as up-to-date information on how a car allowance will impact you financially.
