Offering a 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 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, so there are potential advantages for the business, and offering the widest choice for car benefits can also help to retain your current employees and attract new talent.
What is a car allowance?
A car allowance 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 a car benefit, as it gives your employees the freedom to choose their own car, although you can set out some criteria that their own car must meet, as the car they drive is representing your business and reputation during customer or client visits.
How does a car allowance work?
There isn’t a one size fits all when it comes to a car allowance. Different employers may set up the scheme with their fleet provider in slightly different ways.
If you pay the car allowance into your employees’ gross pay, it’s taxed in 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 car allowance scheme works, which form a blended solution alongside any other of our products.
1. Pay a monthly net car allowance
You can determine the amount by setting bands according to jobs 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.
For more information about how a car allowance could fit into your benefit offering, get in touch.
When it comes to determining the cash amount for the car allowance, 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, to reflect their job role. You can have as many bands as you need to include all your employees.
You should be mindful that the car allowance is realistic and enables your employees to source, maintain and insure their own vehicle.
Tax implications of car allowances
Car allowance is taxable for both you as the employer and your employees. Paying a car 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 form of tax on any car benefit you provide. For a company car, you’ll pay Class 1A NICs so there are associated costs with whichever option you choose.
For your employees, dependent on where they sit within their tax bracket, receiving a car 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, isn’t for another, and this is why providing as many options as you can for a car benefit can help towards retaining your employees and recruiting the best new talent.
Benefits of a car allowance
For your employees, the primary benefit of a car allowance is the freedom to choose their own car and have flexibility over if and when to change their car.
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 a car allowance, your employees can choose to enter into a PCP/PCH contract and they 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 with a large and varied choice list, this could make a car allowance less appealing, but 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 towards keeping morale high among your employees, which can prevent them from moving on. To learn more about how employee car benefits can help toward employee retention, read our blog – Drive Recruitment & Retention: The Power of a Car Benefit.
Potential drawbacks of a car allowance
To implement and keep track of a car allowances, additional business resource is required. 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.
Dependent on other methods you choose to deliver a car benefit, you could be out of pocket by offering a car allowance. A cost-efficient salary sacrifice arrangement or an Employee Car Ownership Scheme could cost you less or could even help generate business savings.
You’ll need to choose a provider that offers a bespoke car solution that looks at your driver population and determines the best car benefit option for each scenario to realise these cost savings. Here at CBS, that’s exactly 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.
Implementing a car allowance scheme
Before setting up a car allowance scheme, it’s important you understand all the tax implications, you’ve considered your banding structure, and you’ve set out a clear policy for how the scheme works including who’s entitled to a car allowance.
To help manage and monitor the scheme, it would be helpful to work with a fleet provider that has knowledge and expertise in car benefits – that way you can ensure your car allowance scheme is fully compliant.
If you’d like more information about CBS’ car allowance scheme, as part of a blended solution alongside any other of our products get in touch to discuss your business needs.
Car allowance vs company car
Company cars, depending on how you deliver them, 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, they won’t be impacted by depreciation costs, 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 car they drive.
For a car allowance, you’ll pay Class 1 NICs but this could be removed if you choose a car allowance solution from CBS. 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 with deciding which option is best for your needs, get in touch.
Looking to implement a car allowance scheme?
There are multiple elements to consider when it comes to implementing a car allowance scheme. 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 other of our products get in touch to discuss your business needs.
There are multiple elements to consider when it comes to implementing a car allowance scheme. 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 other of our products get in touch to discuss your business needs.
FAQs
Is car allowance taxable?
If you pay the car allowance into your employees’ gross pay, they pay income tax, as it’s essentially an addition to their salary. However, a car allowance isn’t subject to Benefit-in-Kind (BiK) tax.
If you choose a CBS car allowance structure, which is when you deliver the car 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 car allowance on a car?
If they’re receiving a car allowance because they’re a car-entitled driver and therefore need a car to do their job role, then yes, the car allowance must be spent on a car. How much is spent is down to your employees, providing their car fulfils any criteria you’ve set out for personal cars.
Does car allowance count as income?
From a tax perspective, if you pay the car allowance into your employees’ gross pay, it’s classed as addition income, and they are taxed accordingly – paying income tax and National Insurance. For other instances, such as getting a mortgage, the bank may not take a car allowance as income, which could reduce the size of the mortgage offered, however, it can vary from lender to lender.