Company Car vs Car Allowance Explained

How company car schemes work is by an employer offering a vehicle to employees that can be used for business and personal use. Schemes like these are vital to job roles that require any sort of travel or the transport of tools and equipment. It must be noted, though, that they can be provided in a variety of different ways that could change whether or not it’s worth it for you.

Outright purchase

This is one of the more straightforward methods of a company car scheme where the business buys the vehicle outright and then offers it to the employee to use.

Finance lease

Unlike outright purchases, finance leases involve the business leasing a vehicle and then the employee uses it throughout the lease term. This can allow for vehicles to be more up-to-date, with potential to change more frequently than outright purchases.

There are also tax benefits to leasing cars which should be considered by a company when making the choice of how to offer a company car. Choosing business leasing vs personal leasing is another decision to make and should be thoroughly considered.

Salary sacrifice

Another option for these schemes is employees giving up or ‘sacrificing’ part of their salary in exchange for the use of the car. Should this method be a choice, it can reduce National Insurance (NI) contributions and tax liability.

Contract hire

This process is similar to finance leasing, but instead of having the option to buy at the end of the contract, the vehicle is returned with no chance of ownership.

Employee ownership scheme

This method involves the employee sourcing the vehicle (through outright purchase or leasing) and the business funds it.

Car allowances, rather than giving you the vehicle, will have the company give additional money to an employee as part of their gross salary. The sourcing of the car and financing is then left up to the employee as they have the funds. These funds can be worked out in different ways, however:

• Fixed car allowances are where a pre-determined amount is paid, no matter the miles driven
• Variable car allowance involves the amount differing depending on the business miles driven in a certain window
• After employees log their business miles, they can have the money reimbursedusing a per-mile rate

Though these are two different methods of employees being provided with cars for work, they do have some crossover. Here are the similarities that both share:

• Both are employee benefits
• Both support work-related travel
• Both increase taxable earnings (Company cars through Benefit in Kind (BiK) tax and car allowance through normal income)
• Both can be used for business and personal use
• Mileage can be claimed on both

They may have some similarities, but there are some significant differences between car allowance vs company cars which may sway your decision. Here are the factors that separate the two:

Company car scheme	Car allowance
Vehicle owned by employer	Vehicle owned by employee
Vehicle choice and use restricted by company policies	Employees get the choice of vehicle and more flexible usage
Subject to BiK tax	Allowance taxed as additional income
Employer covers maintenance and insurance	Employee covers maintenance and insurance
Employee doesn’t need to worry about depreciation	Employee has to consider depreciation
Schemes can include fuel allowance (fuel benefit tax)	Employee pays for fuel (claim back business miles)
Responsibility of costs is minimal	Additional income can be spent flexibly

So, the question at hand is – should you go for a company car or car allowance?

When making this decision, you need to take a few things into account to know if one is better suited to you over the other:

Company car scheme

Best suited to individuals who drive a lot for business as the company will cover insurance, maintenance, and fuel. If the vehicle is used a lot there’s increased risk of variable costs, so having these covered by the employer reduces the worry of potential high costs.

The same applies to people who like to have more frequent car upgrades and up-to-date vehicles. This is because every few years, the vehicle will likely be updated, with things such as lease terms coming to an end.

If you’re an individual sitting in a higher tax bracket too, company cars are taxed via BiK as opposed to PAYE income tax. Because it won’t increase your wages it may be a more logical financial decision.

Car allowance

This option is more beneficial to individuals who are keen to have flexibility over factors such as vehicle choice. With your allowance, you can spend it however you like, meaning that you have more choice than with company cars.

If you prefer to manage your own costs, then this is better for you as you’re in charge of how the money is spent or allocated.

If you don’t drive as much for business, then the fuel allowances that can come with company car schemes can be an extra issue due to fuel benefit tax.

Finally, if you already own a car, then you can use the additional funds to either fund its running costs or just spend the money elsewhere.

Ultimately, whether a company car scheme or car allowance will work best for you is dependent on your individual circumstances. So, providing that you’ve evaluated your situation and considered both properly, either one can be a fantastic option.

If you’re an employer or employee that’s looking for a car to lease, our car matching tool can help you see which is best suited to you and your lifestyle.