Company Car vs Car Allowance

Increasingly, employees and executives are given the option to choose between a shiny new vehicle and an appealing cash bonus. 

To find out which option is best for you, it pays to understand the regular costs and long-term implications.

Benefits of a company car scheme

Driving a company car means you’ll save on the cost of the vehicle itself as well as everyday running costs. You’ll also be freed from many of the less appealing administrative tasks involved in driving, not to mention the hassle of selling your car at some stage in the future.

You can make great savings on insurance and breakdown cover, since these costs are typically covered by the agreement. If your agreement covers fuel too, the prospect of claiming cash back when you fill up the tank can be difficult to resist.

Alongside these savings, you’ll also enjoy the material benefit of a new car every three to four years, meaning you’ll have access to the latest gadgets and fuel-saving technology.

Cost of entering company car scheme

Though the savings sound appealing, there are other ways to save on business insurance and breakdown cover, like choosing a tailored policy from RAC Business. With this in mind, you may be wondering about the costs of entering a company car scheme.

Road tax is one of the key costs you’ll still need to cover with a company car. Since the vehicle you drive can make a big difference to car tax rates, typically you will have a more restricted choice of cars under a company car scheme.

If your company car package includes fuel, you will also need to pay Car Fuel Benefit each month. This is a tax on the cash equivalent of your annual fuel allowance, since this ‘benefit in kind’ is taxed like a salary.

This tax depends on the CO2 emissions of your chosen car, the value of the car when new, as well as your income tax band. The HMRC calculator is a useful tool for working out what this will mean for you.

Aside from the financial costs, you will never own the car. This means you won’t have an asset to sell at a later stage, and will need to find an alternative mode of transport if you decide to change your job

Getting the most out of company car schemes

Even with additional costs like the Car Fuel Benefit, you should still make significant savings if you have a lengthy commute. In general, the further you drive, the greater the financial benefit. 

Since tax will be the primary monthly cost, keeping your tax bill low is a key way to make savings. The simplest way to do this is by choosing a car model with low CO2 emissions.

Taking a company allowance

Few employees get the option to choose cash as a company benefit. If you have the privilege of choice, it makes sense to take the time to decide which is best for you. 

The first step is to find out the value of a cash alternative. Some companies offer the exact value of leasing costs, while others also account for tax in their calculations. The exact figures can be important in determining which option offers the largest financial reward.

Cost of a car allowance

You will take a tax hit on a car allowance, so it’s important to run calculations correctly. 

Receiving a cash sum means you’re liable to pay income tax on the monthly allowance – and you’ll need to foot the bill for any unexpected repairs.

There is greater personal risk inherent in financing your own vehicle, since it is impossible to default on payments within a company car scheme. If you leave your job, the car simply stays there. 

Although there is more freedom to choose your ideal car when you take the cash, your company may still set restrictions. 

While you won’t be limited to a handful of low emission car manufacturers, you might still be unable to buy a three-door or convertible model.

In conclusion

Overall, choosing a cash allowance is the more flexible option, since this cash can be used for a variety of purposes, or to finance your dream vehicle. If you’re looking for freedom or your own set of wheels, cash can be the more attractive option. 

Unless your commute is very short, a company car scheme can offer fantastic savings potential as well as freedom from unexpected costs.