Employer’s guide to car allowance and company cars

Chosing between providing a car allowance and providing company cars to employees is no easy task. While both options are attractive for current and prospective employees, your must consider the better option from a business point of view too.

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Car allowance versus company cars

Car allowance is a scheme where an employer provides the employee with monetary benefits, instead of a company-owned car. The car allowance can be provided monthly, quarterly, or yearly which helps employee purchaseor lease a vehicle, or maintain the one they already own. It is a sum of money that is added to an employee’s salary for the purpose of allowing them to buy or lease a vehicle.

A company car is a vehicle an employee uses for work which is leased or owned under the business name and provided to them by their employer. If you run a business in which employees are required to travel as part of their job then a company car can be an attractive perk.

A company car can be provided for both personal and work purposes. The benefit also helps recruit and retain great staff. For some employees having a company car is an indispensable part of their job role.

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The pros of company cars

Employee performance

Offering a company car as a benefit will help to improve employee performance by ensuring that employees always have a mode of transportation to get their work done. A company car benefit will attract talent as it is a great perk and it eliminates the need for employees to purchase their own vehicles.

Branding

You can choose to brand your company cars by using logos, slogans, phone numbers and web addresses helping to promote your business at any time employees are out completing work duties.

The cons of company cars

The company is responsible for paying for any expenses

Providing company cars to employees increases your liability as an employer. If your employees are involved in any kind of accident then you will be responsible for paying for damages, and this will lead to an increase in the premiums your company pays for car insurance.

The cost of acquiring and maintaining a fleet

Providing company cars will be a substantial investment, especially for small and medium enterprises. It requires a considerable investment upfront to buy the vehicle unless there is a suitable factoring company. There can be additional costs of replacing the car in case of any accidents or theft if your insurance does not pay and added depreciation.

The pros of car allowance

Hassle-free

You don't need to search for a suitable vehicle and are not responsible for maintenance or insurance. Managing a fleet of company vehicles is often an administrative task. A car allowance is a hassle-free, tax-saving option.

One of the main differences of giving employees an allowance, instead of a company car, is that you take the car allowance tax out of the employee’s main earnings at the normal tax rate. This is because the allowance is paid as part of the employee’s salary and for this reason, you do not need to use a car allowance tax calculator but just calculate the employee tax as normal.

Smaller financial obligations

It is a lesser financial obligation than providing company cars as allowances will be paid per month or in bulk per year and you will have no other financial obligations. Car allowance can also prove to be a great incentive to attract and retain staff.

The cons of car allowance

Employee access

New employees may not have access to credit to purchase a car or have a poor credit rating making it difficult for your staff to choose a suitable vehicle. It may also be an alien concept to some sales professionals that have likely benefited from company cars in the past. Therefore, it would mean that potential employees might decline your job.

National Insurance payouts

As an employer, you will be liable to pay National Insurance contributions on the car allowance you pay out, and you still have legal and moral responsibilities that the employees' cars are taxed, MOT’d and insured, well maintained and road worthy.

Which is best for your business?

It will mostly depend on personal preference and your company's situation. Both options have their pros and cons - a car allowance gives freedom to employees to choose their vehicles but comes with more responsibilities for the employee such as maintaining the vehicle and tax payments. Providing a company car may increase responsibilities for your business but can act as a great benefit to attract talent.

Whichever option you choose, if your employees pay for the gas and maintenance of the vehicle's business portion of use, you may be expected to reimburse them for these expenses. See our guide on HMRC mileage reimbursement and deductions, and the 2024 HMRC approved mileage rates to learn about the rules on reimbursing employees.

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