For most of us, one of the basic dilemmas that come with career advancements is to choose between company car and car allowance? Company car or car allowance has been an important non-salary benefit. While it can be a simple topic at first glance, it can have varying tax implications on you. Choosing which would be better will depend on variety of factors from personal preferences and comparison between company car tax and tax on allowance. We need to understand that costs can occur immediately or in long run.
Let’s begin to understand costs and benefits of company cars and car allowance separately. But to understand how these costs and benefits work with your over all circumstances, you need a professional accountant advice so that you optimise your overall expenses and tax amount.
Benefits of Company Car Scheme:
With a company car, you will be saved from paying upfront a larger amount for car purchase. It usually comes with shining advantages of freedom from most administrative tasks of owning a car and buying and latter selling the car at personal will.
In most company car agreements repairs, MOTs and services are usually paid by the employer. Chances for additional savings are even greater if your agreement covers insurance and fuel costs. You can claim back cash for fuel used for company related travels. Company car mileage rates also vary as negotiated.
And the cherry on the top is, most companies will offer you a replacement new and latest car every three to five years; which translates to the benefit that you will have advance fuel saving and low emission technology in your car.
Costs of Company Car Scheme:
It all sounds amazing so far with all the benefits given above. But you need to look at the other side of the coin also. While the insurance is cheaper on company cars, you may negotiate a cheaper one on personally owned car if you do a good survey. The road car tax will still be borne by you either way. But road car tax varies between car makes and models. With company car, you will have restricted or no choice of car make and model. Employers usually bother least for the company car road tax brackets since it will not be borne by them.
Employees receiving fuel benefits will also have to pay Car Fuel Benefit because benefit in kind is always calculated into salary equivalent for tax purposes. Company car tax brackets will depend on company car’s make and model, CO2 emissions and your current income tax brackets. You may find HMRC calculator of use. (https://www.gov.uk/expenses-and-benefits-company-cars/work-out-the-value)
There are some obvious restrictions with company car schemes. You cannot upgrade or install any modification in your cars. You will not be able to buy or sell at your own choice and you will never own the car. If you swap jobs, it could mean you are without a car!
Benefits of Car Allowances:
Normally the costs of company cars become the benefits of car allowances. But careful consideration should go into decision; company car or car allowance. It will be good to know what the exact cash value of the company car benefit is and does it cover leasing cost or leasing costs and tax, both. Car allowance gives you freedom of choosing a car that will be your asset; regardless of whether you continue the same job or not.
For those who already have a car and covering its expenses, the allowance is like a cash boost in your salary. You can always use the money elsewhere. But most of the times, people who do not have a car or still want to buy a car, cash allowance can be used towards Personal Contract Purchase (PCP). The allowance will cover car instalments that will be your asset eventually.
With PCP, employees often charge employer the government set rates that allows fuel mileage rates and 45p per mile maintenance rate for a maximum of 10,000 annual miles. Ultimately actual benefits will depend on what is negotiated between employer and employee.
Costs of Car Allowance:
What can be disadvantages of car allowances? The obvious answer is the benefits of company car. Car maintenance and MOTs are to be paid out of your pocket as well as the car insurance and unexpected repairs. You will also pay tax on the allowance. There is always a risk on defaulting on monthly car installment. You many never be able to buy the latest car models on your personal pockets.
Company Car or Car Allowance
Do you want to make an informed decision? Contact our London Accountants to book an appointment today! Our qualified tax experts provide tailored UK tax advice for both employees and companies. We work with our clients to analyse the value of benefits in kind in empirical tax scenarios. We cater to a wide range of personal and company clients. We work with each client’s individual circumstances to see how we can claim tax relief on car tax, saving you hundreds of pounds each year. For company or business clients we also help them with treating either company cars or car allowance in annual accounts and outsource payroll services.