Many companies give their employees the option of either receiving a car allowance or a company car to perform their business duties. Both options hold several benefits for both the company and the employee. However, each of these options also has its disadvantages.
In this guide, we’ll compare company cars and car allowances, give you the advantages and disadvantages of both and give you the information that you need to choose the best option for your company fleet.
Company Car vs Car Allowance: Comparing The Two Options
There are several factors that fleet managers have to consider before deciding which option to offer their employees. While both options can be very attractive, the business owner also has to consider which one best fits the company.
Advantages and disadvantages of company cars
A company car scheme is where the employer or business purchases a vehicle which is then given to the employee for business use. For employees, this is a good option because they won’t be saddled with the daily expenses of owning and maintaining a car.
However, from a business perspective, these are the pros and cons of offering a company car:
Advantages of a company car:
- Helps improve employee performance, as they always have reliable transport.
- The company car can be branded, which creates additional advertising for the business.
- The business decides which vehicle to purchase and how often to replace the fleet.
- The vehicle remains the property of the business.
- The company can install security and monitoring hardware such as vehicle trackers.
- Employees are not allowed to modify or upgrade the vehicle.
Disadvantages of a company car:
- The business has to pay for repairs, services, MOTs and insurance.
- The company has to foot the driving costs and company car tax.
- Increases the liability of the business (the business will be liable for repair costs which increases insurance premiums in the event of an accident).
Advantages and disadvantages of car allowances
A company car allowance is when a cash allowance is paid on top of an employee’s annual salary which they use to buy or lease a car. This payment can either be given on a monthly, quarterly or yearly basis and the employee will pay income tax on this cash allowance.
For an employee, this is a good choice when they are certain that they would be able to pay for all the driving and maintenance expenses. These are the pros and cons the business would have to consider when offering a car allowance:
Advantages of car allowances:
- The employee is responsible for costs such as repairs, services and MOTs.
- The vehicle owner is responsible for paying the car insurance.
- The employee is responsible for keeping a record of travel distances and expenses.
- The employee pays lower tax costs, which can help attract new talent if offered this option.
Disadvantages of car allowances:
- The business has no say in which type of car the employee can buy or if the vehicle may be modified.
- The employee owns the car and keeps it when leaving the company.
Factors to Consider in Decision-making
The question of company car vs car allowance is a tricky one and will depend on the type, size, and priorities of your business. Before making your final choice, also consider the following factors:
The employer invests a substantial amount of money when buying a company car. With a company car scheme, the business pays tax on the purchase price, while it will also be liable for the maintenance costs, running costs, and insurance premiums. In case of an accident or theft of the company car, the business will have to shoulder the replacement costs.
However, with a company car fleet managers can more easily track and manage fuel costs as well as choosing more fuel-efficient vehicles which can save money in the long run. While purchasing company cars is a significant upfront cost, it’s undeniable that company cars give businesses more control over their fleet’s expenses.
When offering a car allowance, the company can save money, as it does not have to pay for the upkeep, maintenance and insurance of the vehicle. However, this must be balanced with the disadvantages of fleet managers having less control over the vehicles of employees.
When offering an employee a company car, the business is responsible for paying the company car tax. With this option, the employee will pay fuel benefit tax and road tax.
Offering employees a car allowance has less financial risk, but it gives the company less control over their image and driver behaviour, which may have other negative impacts on the company. The car allowance tax is also subtracted from the employee’s salary at the normal income tax rate.
Employees who already have their own car may decide to rather use the cash benefit that a car allowance affords them. They can choose what to do with the money and may even spend this cash sum on something else despite their car having issues that could easily be fixed.
However, some employees may find the company cars that you provide more desirable than their own cars.
Choosing The Most Suitable Approach
Both options can be attractive to employees but, ultimately, the business owner has to decide on the cost implications these perks would have on their bottom line as well as the business goals.
If you’re looking to improve your company image and attract talent, a company car can be a smart way to do this. While from a business’ perspective it may initially seem like a more expensive option, it can bring significant benefits and cost savings in the long term.
If you’re looking to save money short-term, a car allowance might be what you’re after and it will provide employees with more freedom. However, this will give them the added responsibility of maintaining the car and paying for the driving costs. It also gives the business less control over driving behaviour.
Ultimately, the company car vs car allowance calculation will depend on many factors unique to your business.
When deciding to offer employees a company car or a car allowance, there are several factors fleet managers and business owners have to consider. Things like cost, company image, taxes, and driver behaviour all play a role here.
Although it may initially seem like the more expensive option, providing employees with a company car does have a positive impact on the business’s reputation, can prevent bad driving through the use of vehicle tracking, and generally gives the company more fleet management capabilities.
A car allowance, though less costly, limits the business’s control over the type of car that is purchased and whether or not it can be modified. Also, when the employee leaves the company they can take the vehicle with them, as they own it.
If you are still not sure which option would work out best for your fleet, contact us and we’ll help you make the best choice for your business.