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In this guide, we explain everything employers need to know about car allowances, including your employer responsibilities, the benefits and consideration points, as well as information on the financial implications for your business.
The guide then goes on to compare the two options of a car allowance and a company car from the employer point of view, detailing for each, which issues you should consider and the financial implications of each for your business.
With the on-going rise in company car tax, more and more businesses are now offering employees a company car allowance instead of a company car.
A car allowance is an amount of money added to an employee’s salary or wages every month. The amount given is at the discretion of the employer, however, is usually based on the average cost of leasing a vehicle and includes an additional amount to help cover some off the on-the-road costs such as servicing, maintenance, wear-and-tear, repairs, MOT and insurance.
Employees are usually given freedom to choose how they spend their car allowance i.e. whether to use it to buy a car, lease a car, or alternatively, to help fund their current vehicle. Nevertheless, businesses can still place restrictions on the type and style of vehicle driven and also on the age of passengers, minimum safety requirements as well as the vehicle’s fuel type.
In addition to a car allowance, some employers also provide a fuel allowance which pays for some or all of the employee’s fuel. To find out more, read our employer guide to fuel allowance.
NB: The benefits and taxation rules regarding company cars are the same for company directors as they are for employees. Therefore, where the term ‘employee’ is used, this should also be taken to include reference to any Company Director.
Providing employees with a car allowance presents a number of benefits for employers:
From the employee perspective, the benefits to them of you providing them with a car allowance are:
Administration
Unlike with a company car, with an allowance the employee is responsible for almost all administration for the vehicle (tax discs, servicing, maintenance, repairs etc).
Safety/Duty of Care
Importantly, a car funded via a car allowance falls under the jurisdiction of the Health and Safety at Work Act 1974, stating that employers have a duty of care to their ‘grey fleet’. A grey fleet vehicle is a vehicle that is employee owned or leased and used by them, either in part or whole, for work related journeys.
The Act requires employers to ensure, so far as is reasonably practicable, the health, safety and welfare of employees when at work, including whilst driving for work in their own vehicle (as the vehicle is considered a designated workplace).
As a result of this Act, employers should conduct checks on drivers licences, checks on insurance, ‘risk assessments’ of the driver and vehicle and also have a company car policy that reflects the requirements of this Health and Safety at Work Act. To comply with the Act, employees should be asked to read, sign and follow any requirements or restrictions that you as the employer place on the vehicle to ensure compliance with the Act. Ideally a company car policy expert should be engaged to help draw up a vehicle policy to ensure the business is fulfilling it’s legal ‘corporate responsibilities.
Typical company policies include at least some restrictions on factors such as who can drive the vehicle, who can travel in it, what it can be used for, the age of the car, the body type, engine type and level of CO2 emissions.
As an employer, you’ll need to ensure your employees understand their responsibilities on being offered a car allowance:
Employers should take the following factors into consideration when offering a car allowance:
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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