The UK government is continually making changes to company car tax legislation, leaving business owners confused as to what option is best.

After the government announced further changes commencing this April, it’s a good time to re-visit the options for both companies and employees.

Company Cars Explained

In short, a company car is a vehicle provided to employees as a part of their remuneration package. It is a taxable benefit to the worker, worked out using a system called benefit in kind (BiK). The rates of BiK tax change every year, so as a company it is prudent to keep on top of it.

The equation that works out how much tax an employee will pay is calculated using the following 3 factors: the driver’s earnings, the cost of the car and the amount of CO2 the car emits.

A person earning a lot of money, with an expensive car which emits high CO2s is going to pay a lot of benefit in kind tax. Conversely, someone on a lower income, with a cheap car which has clean emissions is going to pay much less. Thankfully there are company car tax calculators businesses/employees can use to compare costs between vehicles, making the decision process simpler.

Company cars are managed by the business itself, either by an in-house fleet manager or an outsourced specialist. Both of which are additional costs which the business has to fund.

Cash Allowance Explained

A cash allowance is where employees are given a monthly cash payment in order to source their own car, from a dealership or web broker. The cash allowance is simply added on to the employee’s salary, meaning it is subject to normal income tax.

Unlike with a company car scheme, unless the firm gives strict instructions to drivers, employees are free to choose whatever car they like. Whereas with a company car scheme it is often a single brand or even model that drivers can choose from.

This form of obtaining a car is essentially the same as being a cash buyer for employees according to lease car provider ICL. The employee is individually responsible for insuring, repairing and maintaining the vehicle (although many lease contracts these days include maintenance in the price).  The difference is that the driver can be taxed more, as it’s an addition to their current income, rather than a separate calculation based on the car itself.

Cash allowances involve much less administration for the business, as it’s a simple addition to the employee’s earnings through PAYE.

Which is better?

Neither option is explicitly ‘better’ as each has its own benefits and shortcomings.

For drivers, a company car scheme is usually less hassle but more restrictive. They choose a car from the list provided to them and have far less to administrate/do than if taking an allowance. Depending on the CO2 and value of the car they choose the tax implications can be significantly less as well.

A cash allowance gives drivers more freedom of choice, but it is possible that they’ll be taxed higher due to the payment being subject to their 20-40% (or more) income tax banding.

For companies, the decision is one which comes down to levels of administration and control over vehicles. With company cars, there is a more human resource needed to monitor and manage the fleet. With cash allowances, this administration and maintenance of the vehicle are mostly passed onto the driver.