Company Car Allowance

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Company Car Allowance / Car Lease Schemes

An alternative to providing your employees with company cars

Offering employees a company car allowance / opportunity to join a car lease scheme instead of a company car will mitigate employers Class 1A National Insurance Contributions (for providing both a company car and — in some cases — fuel) and remove employees’ company car tax liabilities — a potential win-win scenario for both parties. A company car allowance, also known as ‘cash for car’, is — put simply — a salary enhancement paid to the employee in lieu of the provision of a company car.

-> See also Car leasing explained

The company also benefits by removing the Whole Life Costs associated with operating a company car and the cost burden that administration of running a car fleet brings with it. The employees also benefit greatly, as they will effectively see a pay rise in their monthly salary, based on PAYE deductions associated with the Benefit in Kind (BIK) calculations of company car tax.

The shift to company car allowances was partially driven by the Labour Government’s 2002 Budget changes to Benefit In Kind (BIK) tax, which forced many desirable “status cars” off user-chooser company car lists.

Employees can use their monthly salary enhancements to buy or lease a new car, either by using conventional funding methods — hire purchase and lease purchase — or by choosing a personal contract purchase (PCP) agreement or personal contract hire (PCH) agreement, which are offered by many of the UK’s top leasing companies.

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The latter two leasing agreements involve paying fixed monthly payments or rentals. With PCP contracts, ownership of the car is normally through payment of a final balloon payment, but both options normally provide the lessee with the option to hand the car back at the end of the agreement (normally 2 or 3 years) — subject to a pre-agreed mileage and fair wear and tear.

Employees using their own cars for business mileage can recoup some of their motoring costs by claiming back tax and National Insurance Contribution-free (NIC-free) Authorised Mileage Allowance Payments (AMAPs). The Government has set the target at 40p for the first 10,000 miles in a tax year and 25p per mile thereafter. Caution with such schemes is advised here, as there is a potential risk that these could payments provide employees with incentives to drive more business miles than is actually necessary.

Though they have many benefits, Company Car Allowance / car leasing schemes can under-deliver in the following areas:

  • Excessive mileage claims
  • Inadequate insurance issues, as cars may not be properly insured for business use
  • Vehicle safety issues, as employers still have a duty of care over their business drivers, even if employees drive their own cars
  • During a recession, Company Car Allowances can become more expensive, while the price of new cars can often fall in real terms. Employers can find themselves paying Company Car Allowances to employees that actually costs them more than providing the employee with a company car.

Naturally, some employees may opt to buy a used car with a cash allowance. However, it is generally larger, less fuel-efficient cars that offer the best value second hand. This could have an adverse affect on any environmental goals that the company might have.

Managing your “Grey Fleet”

grey car for company car allowance and lease schemes pieceEmployers retain responsibility for an employee’s safety — even when the employee drives their own car for business — as it is a designated workplace. Often, this can cause unforeseen problems, as these vehicles are typically “off the radar” of most companies — certainly in respect of being fit for purpose.

Whilst many companies were unwinding their company car fleets due to increase company car taxation, many businesses failed to recognise that they would still have duty of care responsibilities over their employees who would drive their own vehicles on company business. These vehicles are referred to as a company’s “grey fleet”.

Here are a few tips that should help businesses to keep track of its “grey fleet” drivers:

  • Support your grey fleet employees, so that they make an informed decision about taking a Company Car Allowance in lieu of a company car. Employees could spend the next three or four years wondering if they have made the right decision. Help them by explaining exactly what each choice will mean to them in terms of their personal tax position and other items of expenditure associated with running a car.
  • Regularly check the driving licences of your “grey fleet” employees. And make it compulsory for all business drivers to regularly submit copies of their driving licences, as businesses are required to have these records by law. Better still, use a third party to run a thorough check with the DVLA.
  • Where an employee’s own vehicle is used for business journeys, restrict their choices to exclude soft-tops or old cars. Staff will be resistant to any policy that comes across as too heavy-handed, but it’s fair enough to mandate that the vehicle has four doors, four seats and is of professional, business-like appearance.
  • Invest in a robust mileage tracking tool, preferably with a payroll reporting facility.
  • Tighten-up the management of a mixed fleet. Many companies offer a casual version of this by offering car allowances and company cars alongside each other, but a specialist mixed fleet provider will manage a mixed fleet in the most tax-efficient way, and take care of all the mile-logging, occupation road risk and general administration tasks. This type of scheme would only be suitable for fleets of over 50 cars.

If you are looking for a tool to help you manage both your fleet and grey fleet drivers look no further than Car leasing made simple’s Fleet Management Made Simple tool.

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