Employee's guide to company cars and car allowance

Company cars and car allowance are potential company car schemes employers might offer you as a work benefit, especially if you do a fair amount of business driving. 

Whether it’s through using a vehicle provided by your employer (a company car) or a lump sum that allows you to buy or lease a car (car allowance, also known as car stipend), both options can be attractive to you as an employee. 

But how do you know which option is right for you? In the case that you’re presented with a choice, we’ve compiled the pros and cons of company cars vs car allowance, so that you can compare make an informed decision based on your circumstances.

If you’re an employer looking to compare the two from a business perspective, head to the employer guide instead.

Car allowance versus company cars

Car allowance is a scheme where the company helps you lease or purchase a car (could also be spent on maintaining your personal vehicle), instead of providing a company-owned one. Allowance can be paid out every month, quarter or year, and it’s usually added on top of your regular salary. 

On the other hand, a company car is owned or leased by your employer and provided to you as a work benefit for business driving and, in some cases, also personal use.

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Pros of company cars 

Lower benefit in kind (BIK) rates

Depending on your chosen car, you can benefit from a low benefit in kind (BiK) tax rate, which is much lower than the tax you will pay with a car allowance. That’s because car allowance is taxed as a part of your salary, therefore taxed at your standard income tax bands. However, if you have a hybrid or electric company car with lower CO2 emissions, your benefit in kind tax rates can be much lower.

Lower insurance and maintenance costs

Most employers include the costs of maintenance and insurance in their benefit packages. This means you won’t have to cover these with your salary.

No depreciation

From the moment a car is purchased, it begins to lose its value i.e. depreciate. However, with a company car depreciation is something you don’t need to worry about, as the resale value or lease payments would be your employer’s concern.

Opportunity to drive a new car

Many employers like to update the company car fleet regularly. This means you may end up driving some of the latest models on the market, without having to spend anything.

Cons of company cars

Choice limitations

You may be limited to the choice of car from an employer-approved list or fleet. This may not be to your liking, or can even cause your benefit in kind rates to be very high if the models your employer uses have high CO2 emissions.

Non-ownership

With a company car, the vehicle remains the property of your employer. Therefore, if you were to leave your job or no longer qualify for the company car, you would have to return it to your employer.

Liability for fuel benefit

If your employer has provided fuel alongside the company car and you have used it for personal use, you will be expected to pay a fuel benefit.

Pros of car allowance

Flexibility in leasing or owning

With car allowance, you can choose the car you want to drive (subject to company guidelines, it’s best to check directly with your employer).

There is also more flexibility in terms of ownership since you can choose whether to purchase or lease a car with your car allowance. If you already own a car, you can still apply for car allowance from your employer and use it to maintain your personal vehicle. 

Keep in mind that if you do choose to buy or lease a car with your stipend, this can still be limited to a few minimum specifications from your employer, so it’s best to check with them before deciding on a model.

Possibility to claim mileage allowance

A great perk when opting for car allowance is that you can also claim mileage allowance (up to 45p per mile) for your fuel mileage and petrol costs. This means more savings for you.

Cons of car allowance 

Greater tax implications

Car allowances are taxed as part of your salary so you can expect bigger tax ripples, including your monthly car allowance being taxed at the income tax band you qualify for.

Personal and financial liability

With a car allowance, you bear more of the financial responsibility of having the car. This includes the cost of insuring your car, running costs, and even the type of car you drive.

Should I choose a company car or car allowance?

When deciding if it’s better to have a company car or opt for cash allowance instead, consider a few things, such as the amount of tax you will pay with each option, the impact on your personal finances, and whether you would need to use personal funds.

• If you’re on a lower income, a company car with all additional expenses covered by the employer will be a better choice for you. If you opt for a cash allowance versus a company car, you can expect to pay both national insurance and tax on it.
• Consider the CO2 emissions of the company car provided. If it’s a low- or zero-emission vehicle, it will lower your BIK tax rate, while a gas-guzzling vehicle will have the opposite effect. In that case, a car allowance might be a better deal. 

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