Just few years back, the Company Car was considered as one of the best employee benefits packages, but now tax on company cars continue to rise therefore, a number of businesses are deciding to take the alternatives. The most common alternative to offer is a car allowance which could be financially sound for both company and the employee.
So, if you are in a trouble deciding which option to choose between a company car or a car allowance then this guide will helping you know pros and cons of both options.
Why Car Allowance is Better?
A number of people are considering car cash allowance rather than a company car this means you can use your personal vehicle and in return receive a mileage based cash incentive from your employer. This is called Inland Revenue Authorised Mileage Rate (IRAMR).
Most of the employees enter into the PCP agreement while receiving a car allowance. The sum of taken out credit for the PCP particularly covers the depreciation of the vehicle over the duration of the agreement, rather than its full value.
This helps to reduce the monthly cost, also it bounds the employee in a fixed term agreement covering several years which can represent a threat to those whose employment is not considered safe.
Just when the agreement duration reaches to an end, the employee is free to either handover keys back or purchase the vehicle or enter into a new PCP agreement.
Meanwhile, employees have the right to claim back business mileage from employer or against their incurred income tax bill.
However, regardless of the tax flexibility and efficiency, The HMRC report 2017 released that the number of employees paying company tax has reached a five-year high.
In comparison with a PCP deal, the company car provides more security and the driver is not required to worry about issues like car maintenance, insurance, service cost and etc.
From a different tax viewpoint, instead of being taxed on the value of cash allowance, the employees are taxed on the basis of a theoretical value of the benefit, a combination of the list price and vehicle’s emission etc.
Calculating the Benefit Tax
Benefit in Kind – BIK – is one of the main obstacles to a company car. It’s a tax based on the fact that you will use the car for personal use. That is a benefit in kind, and the rate of tax depends on the car’s P11D price, itself depending on the car’s CO2 emissions.
Since the P11D price is the value of the car’s list price plus VAT, plus delivery and all options over £100, you can work out the P11D price. Multiply that by the percentage that applies to the CO2 emissions, then multiply that by your income tax band – 20% or 40%.
What if I own my own company?
The decision changes a lot if you own your own company and the tax consideration vary intensely based on your individual circumstance and the car you want to drive. Low emission vehicles attract enhanced allowances too so, selecting the right car is very important.
In addition, VAT registered businesses may be able to claim back some of the VAT consumed on the lease costs or purchase price too.
Moreover, the company car scheme affects whether drivers go for a company car or a personal lease deal.
In case, if this structure is not organized properly then people start looking for PCPs along with their cash allowance. Somehow it allows them more manufacturer choice and therefore greater flexibility