Offering a company car allowance as a cash sum can be a great boost to your overall car benefits package. You might have some employees who favour the car option, but for those who don’t, being flexible and giving them the freedom to choose their own car could make you stand out as an employer of choice.
The best car benefit solution has something for every driver and every need, so adding a car allowance alongside your company car options – whether by Employee Car Ownership Schemes, Salary Sacrifice Cars or Business Car Leasing – is likely to be a good move for your business.
With a car allowance, you’re in control of setting the banding and how much cash each employee receives – this generally varies depending on role and seniority. This has potential advantages for the business, and offering the widest choice for car benefits can also help retain your current employees and attract new talent.
What is a car allowance?
It works by you as the employer giving a monthly cash allowance to your employees as an employee benefit, which they then use towards the cost of their own vehicle that they purchase, maintain and insure.
A traditional car benefit offers your employees a car from a choice list that’s pre-approved by you. Depending on your business objectives, you might have petrol, diesel or electric cars to choose from or a combination of all three.
Car allowances differ from car benefits in that they give your employees the freedom to choose their own car. However, you can set some criteria that their own car must meet, as the car they drive represents your business and reputation during customer or client visits.
How does a car allowance work?
There isn’t a one-size-fits-all solution. Employers may set up the scheme differently with their fleet provider.
Paying the allowance into your employees’ gross pay is taxed the same way as their salary - income tax and National Insurance Contributions (NICs) are payable - so they won’t receive the full amount. However, here at CBS, we have a structure for a car allowance, where the cash is paid into the net pay, so your employees receive the full amount.
Here’s how our allowance schemes work to form a blended solution alongside our other products.
1. Pay a monthly net allowance.
You can determine the amount by setting bands according to job roles and seniority.
2. Your employees pay for their own car privately.
This can be via purchase, Personal Contract Purchase (PCP), Personal Contract Hire (PCH), and they’ll also need to insure it for business use.
3. You have need to ensure the car meets condition guidelines.
Employees are responsible for servicing and maintaining the car.
What is a reasonable car allowance?
When determining the cash amount, the typical way is to divide your employees into bands.
Your top-tier band would normally include your most senior staff and would likely have the largest car allowance, reflecting their job role.
You can have as many bands as you need to include all your employees.
You should ensure that the car allowance is realistic and enables your employees to source, maintain, and insure their own vehicles.
Is the allowance taxable?
Car allowance is taxable for both you, as the employer and your employees. Paying an allowance in the traditional way, directly into your employees’ gross salary, means it’s treated as additional income for tax purposes. So, the usual Class 1 NICs are applicable for you to pay, and your employees pay income tax and NICs – the same as they would for the rest of their salary.
As a business, you’ll pay some tax on any car benefit you provide. You’ll pay Class 1A NICs for a company car, so there are associated costs with whichever option you choose.
Depending on their tax bracket, your employees receiving an allowance could push them into a higher tax bracket, moving from 20% to 40%, for example, which is likely to have a significant impact on their net pay. This could be a scenario when a car benefit is more appropriate.
Every employee is different, which is why it’s a good idea to work with a fleet provider that understands varied employee populations. What’s right for one employee may not be right for another, and this is why providing as many options as possible for a car benefit can help you retain your employees and recruit the best new talent.
The benefits
For your employees, the primary benefit of an allowance is the freedom to choose their car and the flexibility to change it, if and when they choose.
Your car benefit comes with a choice list, so employees can only choose from a pool of cars pre-approved by you. For some businesses, the choice list may be vast, for others it may be smaller, having a car allowance removes that restriction for your employees.
Your car scheme may also dictate that your employees have a car for a certain time period. This could be short, 6-12 months, or longer, 3-4 years. With an allowance, your employees can choose to enter into a PCP/PCH contract and accept those terms, or they may opt for an outright purchase that could be kept longer than any finance contract.
Ultimately, it comes down to choice. If you’re an employer wanting an extensive and varied choice list, this could make a car allowance less appealing. Essentially, every employee has their own opinion on what’s right for their lifestyle.
Offering as many options as you can for a car benefit can help keep morale high among your employees, which can prevent them from moving on. To learn more about how employee car benefits can help employee retention, read our blog: Drive Recruitment & Retention: The Power of a Car Benefit.
Potential drawbacks
Additional business resources are required to implement and track allowances. This includes administrative duties, as well as safety and vehicle maintenance checks to ensure cars are fit to drive and adhere to any guidelines you’ve set out.
Depending on other methods you choose to deliver a car benefit, you could be out of pocket by offering an allowance. A cost-efficient salary sacrifice arrangement or an Employee Car Ownership Scheme could cost you less or could even help generate business savings.
To realise these cost savings, you’ll need to choose a provider that offers a bespoke fleet solution that looks at your driver population and determines the best car benefit option for each scenario.
Here at CBS, that’s precisely what we do. We look at what you’re doing today and what you want to achieve in the future, and design a solution around your business objectives.
Car allowance vs company car
Depending on how you deliver them, company cars will cost the business in some way, but with a bespoke fleet solution, these can be kept to a minimum. With a company car, your employees could benefit from low Benefit in Kind (BiK) tax rates, depreciation costs won’t impact them, and there’ll be no unexpected maintenance costs. They’ll also get to drive a brand-new car. On the downside, their choice could be limited, BiK tax could be expensive, and they’ll never own the vehicle they drive.
You’ll pay Class 1 NICs for a car allowance, but this could be removed if you choose a CBS solution. Your employees have the freedom to choose their own vehicle and decide whether they buy or lease. However, they’ll take on full financial responsibility, including running costs, maintenance and fuel, and possibly monthly finance payments.
To get help deciding which company fleet option is best for your needs, read our blog: Which Car Solution is Right for Your Fleet?
Looking to implement a car benefit scheme?
Your implementation strategy must consider multiple elements. It needs to work for your business objectives and your employees. The best possible car benefit scheme would include a variety of ways to deliver the car benefit, only one of which is cash.
If you’d like more information about CBS’ car allowance scheme, which forms a blended solution alongside any of our other products, get in touch to discuss your business needs.
FAQs
Is the allowance taxable?
If you pay the allowance into your employees’ gross pay, they pay income tax, as it’s essentially an addition to their salary. However, a allowance isn’t subject to Benefit-in-Kind (BiK) tax.
If you choose a CBS allowance structure, which is when you deliver the allowance to your employees’ net pay, then tax is payable, but is settled at the end of the tax year via a Car Benefit Loan.
Do employees have to spend the allowance on a car?
If they’re receiving an allowance because they’re a car-entitled driver and therefore need a car to do their job role, then yes, the allowance must be spent on a vehicle. How much is spent is down to your employees, providing their car fulfils any criteria you’ve set for personal vehicles.
Does the allowance count as income?
From a tax perspective, if you pay the allowance into your employees’ gross pay, it’s classed as additional income, and they are taxed accordingly, paying income tax and National Insurance. In other instances, such as getting a mortgage, the bank may not take the car as income, which could reduce the size of the mortgage offered; however, it can vary from lender to lender.