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If you’re an employer wondering whether it’s better to offer staff a company car or a car allowance, then this guide is for you because we take you through a direct comparison of the two schemes and explain all you need to know to help you make the right decision.
NB: The benefits and taxation rules are the same for employees as they are any company director being given a company car or van, therefore where the term ‘employee’ is used, this includes reference to any company director being given a company car/van.
When choosing between offering a company car or a car allowance, businesses should consider the following 3 key factors:
An increasing number of businesses are moving away from offering company cars because of tax reasons. Instead they’re offering car allowances because in general the cost to business is potentially less.
With a company car, the expense to the business will depend upon the type of business you are, the type of journeys the vehicle is used for and whether the car is owned or leased. When calculating the total cost of a company car, remember to include any fuel allowance that the business may provide. To find out more, read our employer guide to fuel allowance.
If you offer staff a company car and you are the proprietor of one of the following entities, you will need to pay company car tax/Class 1A National Insurance Contributions (NICs):
You are exempt from having to pay company car tax however if you are the proprietor of one of the following types of business:
If the company car is business-use only, the business will not have to pay company car tax on the vehicle. If, however, the vehicle is used for mixed private and business use, this is perceived by the HMRC as a ‘benefit in kind’ or BIK and your business will have to pay Class 1A National Insurance Contributions (NICs) on it. The current rate for this is 13.8% of the value of the benefit (i.e. of the vehicle or the vehicle plus any fuel benefit also provided).
The amount of NIC payable on a company car is determined by the following factors:
The exact amount of NIC payable by employers on the vehicle is calculated by multiplying the vehicle’s emissions banding (including its engine type) by its P11d value. This figure is then multiplied by the annual percentage rate for NI contributions (currently 13.8%) to give you the NIC amount payable on the vehicle for that year, e.g.:
It is important to understand and be able to communicate to your employee what a company car will cost them. Again, employees will only need to pay benefit in kind tax (BIK) for a company car if there is mixed business-private use. If there is any degree of private use, they will need to pay BIK and this is determined by the following factors:
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.:
The overall cost of leasing a company car - including up-front costs, ongoing costs and impact on business capital – is very different when compared with the cost of owning a company car. The following chart details the different cost factors to consider:
| Buying a company car | Leasing a company car | |
|---|---|---|
| Financial Benefits |
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| Financial Considerations |
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When calculating total cost of a car allowance, remember to include the cost of any fuel allowance the business may provide. For more information, read our employer guide to fuel allowance [LINK].
Employer-Payable NIC
In contrast to the company car, a car allowance is an effective way for businesses to avoid or reduce company car tax (i.e. NIC payable on vehicles) as no company car tax is payable on a car allowance. Instead, employers simply pay NI contributions on the vehicle at the employee’s personal tax rate.
Employee-Payable BIK
Similarly, 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 the employee’s usual tax rate and at source, so National Insurance Contributions are applied at this point.
It is worth considering the difference in administrative load that the business will face if offering a company car rather than a car allowance.
With a company car that is owned (i.e. purchased either outright or over time) by the business, the business is responsible for all administrative aspects relating to the vehicle - MOT, tax disc, breakdown cover, servicing, maintenance, repairs etc. If the car is leased however, most if not all of these will be included in the lease package, so whilst the business still needs to hold these documents, the admin task is considerably reduced.
With a car allowance, it is the employee that carries the administrative responsibility including the responsibility for maintaining a mileage logbook, arranging/booking in servicing, maintenance, repairs, MOTs, tax discs, insurance, vehicle breakdown cover etc.
So, if you’re looking for minimal administrative load for your business, consider opting to provide employees with a company car lease or else a car allowance.
Information is provided as a guide only. Select Car Leasing cannot be held responsible for any personal or business decisions made as a result of information provided in the guides. As with all aspects of taxation, it is the responsibility of individuals and businesses to understand the rules and regulations and act accordingly. As personal and business circumstances can vary, it is also advised that you take professional accounting advice before making a final decision.
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
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