Company Car Or Car Allowance: Which Is Better For You?
A company car has always been considered the epitome of benefits provided by an employer to their employees. Still, with people getting more aware of the alternatives to company cars, a question has arisen on everyone’s mind. Company car or Car Allowance, which one is better?
This guide will look at both sides of the debate to help you decide which one would be better.
What Is A Company Car?
Limited Company often tend to provide incentives to their employees, benefits on top of their remuneration. One such incentive is to provide an employee with a mode of commuting in the form of a company vehicle.
A company car is a vehicle offered to employees by employers for personal or business use to provide them with commuting benefits. This offer is usually made to individuals whose job description requires them to travel around often for business purposes.
If employees are provided with a vehicle to commute, in that case, the total amount, equivalent to the total market value of the car, is added to the employee’s annual remuneration package. This approach is usually adapted to levy some of the taxes as the subsequent deductions are made by the employee receiving the benefits.
A company car is an exceptional way of relieving some financial stress away from employees while keeping their loyalties directed towards the business. However, if employees are provided with such an incentive, they need to be aware of the tax obligations that come with it.
Tax Liabilities On Company Car
The tax liability incorporated with a company car is also known as the Benefit In Kind. BiK tax and is a little complicated to work with; however, we have made it as simple to understand as possible.
The benefit in kind, BiK tax, might get a little confusing as there are quite a few variables involved in the calculation of BiK for a company car, such as the different tax rates applied on a carbon emission car as compared to electric vehicles. Additionally, other emission factors might also impact the total tax applicable; for example, HMRC applies an additional 4% on top of your P11D value of diesel cars if it is not compliant with RDE2.
The total BiK value provides you with a cash value which can then be added to the annual employee P11D values. The total amount of BiK tax charged can not be higher than 37% of the complete listing price of the vehicle, in the case of diesel cars, the additional 4% will also be levied.
The following factors are what affects the rate of company car tax that employees receiving the benefits are liable to pay.
- The age of the car.
- The engine size.
- The CO2 emission of your car.
- The fuel used by your company car.
- The P11D value of your car.
- Your income tax band.
Employees also get tax relief if they are provided with plug-in hybrids or electric cars.
Calculating The Benefit In Kind (BiK) Tax Applicable
The following formula can be applied to calculate the BiK tax,
P11D value in pounds x percentage BiK rates x Income Tax Band percentage = Annual BiK tax payable
For example, consider the car given by the company values up to £25,000 and the income of the receiver is £45,000 which makes them a part of the basic tax rate. Now if the CO2 emissions of the car ranges between 105-109 Grams/Kilometer, you will have to apply 25% BiK tax to the company car provided.
In this case, the total annual BiK tax payable would be,
£25,000 x 0.25 x 0.20 = £1,250
Meaning the receiver would be liable to pay £1,250 annually on the company car provided to them.
Add in a table with the heading “BiK Rates For 2021/22”
Table 1: NEDC BiK Rates For 2021/22
Cars registered before 6 April 2020
|CO2 (g/km)||Electric Range (miles)||2020-21 (%)||2021-22 (%)|
Table 2: WLTP BiK Rates For 2021/22. (New cars registered after 6th April 2020).
Cars registered from 6 April 2020
|CO2 (g/km)||Electric Range (miles)||2020-21 (%)||2021-22 (%)|
How To Work Out Company Car Tax?
The following factors are what determine the value of company car tax or the P11d value:
- CO2 Emissions
- The Fuel Type of the Car
- The Value of the Car
- Personal Tax Rate
- Personal Contributions
Carbon Dioxide Emissions:
As a measure geared towards becoming an environment-friendly country, the government uses CO2 emissions to determine at what percentage the car should be taxed. The higher the CO2 emissions, the higher the rate of company car tax would be. For example, a petrol car, registered before 6th April 2020, that emits between 60 grams to 64 grams of CO2 per KM is taxed at 17% of a car’s total value in the fiscal year 2021/22. Similarly, a petrol car registered after 6th April 2020 emitting CO2 between 60 grams to 64 grams is taxed at 16% of a car’s total value in the fiscal year 2021/22.
A diesel car, registered before 6th April 2020, emitting 125 grams to 129 grams of CO2 per KM is taxed at 34% of the car’s total value in the fiscal year 2021/22, 30% as BiK due to higher emission rates and a 4% supplementary charge if the car does not pass the RDE2.
What Is My P11D Value?
The P11D is a form that an employer needs to fill for each employee, current or former employees upon request, at the end of every fiscal year if they provide their employees with any benefit. This form is put in place to protect the benefit of the state and restrict businesses from abusing the benefit in kind system for personal gains.
P11D values are the monetary values assigned to the car in the P11D form, as it is difficult to charge tax on a second-hand vehicle or a vehicle in use. Hence, HMRC uses listing prices and P11D values to evaluate the car and generate a tax amount.
The P11D values are calculated by summing up,
- The listing price of the vehicle.
- Cost of delivery.
- Optional extra fees
Do note that HMRC does not include road tax and the first year’s registration fee in the P11D calculation.
Personal Income Tax Band:
Another critical factor in determining company car tax is the personal income tax band.
Following are the income tax bands for the financial year 2021/22:
- Basic Rate taxpayer — up to £50,270 — 20%;
- Higher Rate taxpayer — £50,271 to £150,000 — 40%;
- Additional Rate taxpayer — over £150,001 — 45%.
The higher your personal income tax band, the more tax you are liable for as company car tax. We advise that you consult or outsource a professional advisor providing tax and accounting services in the UK for detailed guidance.
Any contributions made to the car’s cost by the employee will be deducted from the final benefit in kind tax liability.
For example, the vehicle is undergoing repairs and maintenance works and remains out of use for 30 consecutive days, coupled with not having any replacement vehicle for usage in the meantime. In that case, the employee’s benefit in kind tax will be reduced in proportion to the time they have not used the car. You can calculate the tax liabilities on your car through HMRC Company Car Tax Calculator.
For Electric Company Car Drivers
Any hybrid vehicles with low emissions ranging from 1 – 50 g/km, the electric range of over 130 miles are liable for a 1% charge on the list price in the tax year 2021/22, increased to 2% in 2022/23. Moreover, choosing an electric company car will help you claim multiple tax reliefs and congestion charge exemptions. Hence, opting for pure electric cars is possibly the best way to reduce your company car tax liabilities.
Penalties Involved With P11D
Like other tax liabilities, there are consequences for showing negligence while filing P11D forms by employers.
In Case Of Non-Submission Or Overdue
In a non-submission case or an overdue, the offender will be charged £100 per every 50 employees, every month or part-month until the payments are made.
A penalty is imposed based on the appropriate percentage of revenue lost depending upon the nature of the error and the taxpayer’s guilt.
- 100% in case of a deliberate action or any fraudulent activity.
- 70% in the case of deliberate but unconcealed action.
- 30% in case of a careless mistake on the taxpayer’s part.
- 0% in case of a genuine mistake made by the taxpayer.
In Case Of Unpaid Taxes
In case of non-payment of taxes, the HMRC also charges an increment of 5% of the total tax amount after a certain period has passed without any payment of taxes.
|Penalty % of the amount imposed||When paid|
|0%||1 – 29 days after the due date|
|5%||30 days after the due date (i.e. 6 Aug)|
|10%||6 months after the due date (i.e. 6 January following the tax year-end)|
|15%||12 months after the due date|
If there is an amount overdue in PAYE settlement agreements, the same penalties would apply.
Please note that no penalties would be applied if the taxpayer could present a reason deemed Reasonable by the HMRC and had paid the tax as soon as they were able to. The definition of “Reasonable” in this case would differ from organisation to organisation and departments, but would generally encompass unforeseen events.
Interest On Late Payment
The interest to be paid is charged on the amount that has been paid after the due date, i.e., 19 July, and is to be implemented over a period of time allowing for the HMRC computer system stages to be upgraded.
In Case Of Cessation Of Business
If your business ceases to exist, you might be liable for Class 1A national insurance contributions earlier than the usual due date. You are required to pay all your outstanding liabilities within 14 days, 17 days if paying electronically, of the last tax month, or a quarter of your usual in-year payments were done quarterly, in which the final payments of ‘general earnings’ are made to an employee (Regulation 73(4) Social Security Regulations 2001). Depending upon the circumstances under which the cessation occurred, this could be earlier or even after the date of cessation, due to trading purposes. And the forms are rather submitted in-year than at year’s end.
Benefits Of A Company Car
The following benefits are what employees would enjoy if they opt for receiving a company car,
As an employee, most of the technicalities are taken care of by the employer, and you don’t have to worry about insurance, lease payments, or maintenance costs.
Your driving costs or fuel costs are usually reimbursed or paid for by the employer, so you have nothing to worry about fuel costs when using the vehicle for business purposes.
Low BiK Rates Apply
The BiK rates charged as tax are usually only a tiny fraction of the total car’s cost. The highest BiK rate can go to is 37% of the total car cost 41% in case of diesel consumption.
Though It is one of many ways to reduce corporation tax, the following are the additional benefits an employer can receive when providing a company car,
When providing your employees with a company car, especially in the case of sales representatives, you can use your brand identity on the car and let it take part in your marketing campaigns.
Acquisition Of Assets
An employer would acquire a new company asset that can be moved over to another employee if necessary.
Attractive On Papers
The promise of providing a company car looks very attractive to potential employees and can help you secure top of the line talents.
What Is A Pool Car?
Note that a company car is different from pool cars provided by the company; employers are liable to pay taxes on vehicles used as a pool car. But to have the car qualify as a pool car, there are a few conditions defined by the Employment Income Manual, ITEPA 2003, s 167(3) that are needed to be satisfied. These conditions are as follows,
- The vehicle was made available by the employer and used by more than one employee of the company.
- The vehicle was made available to the employees due to the reason of employee’s employment.
- The car was not used by the involved employees previously with exclusion to the others.
- Any personal use of the car made by the employee for private reasons was purely incidental towards the employee’s other uses of the vehicle. A purely incidental case would be that an employee had to travel a long distance for business purposes and had to leave early in the morning. They can take the pool car the evening before to enable themselves the head start in the business trip.
- The car was not kept by the employee at the residential premises of an employee overnight but can be kept in the vicinity of the residence of the one making the car available. You can consider a car is not normally kept at the employee’s residence if the total number of nights the car has stayed at the employee’s residence is less than 60% of the total time period under review.
If your car satisfies all these conditions then it can qualify as a pool car, in which case, the tax liabilities fall under the responsibility of the employer.
In Case Of Disqualification
In the case of a false claim of Pool car or false car classification, the employer may face strict penalties, including,
- A fine of up to £3,000.
- Payment of backdated company car tax up to 4 years.
- Payment of backdated National Insurance Contributions up to 6 years.
- Penalties on late filing of these relevant taxes.
Although there are a few circumstances that require additional attention of employees as well such as, if two or more employees are using the pool car together to commute towards work but two of them make use of the same car for their private business as well, the two employees involved in using the car for their private use would be liable for paying the full company car tax on the vehicle.
Additional Benefit: Mileage Allowance
The employees can also claim for mileage allowance and get the employers to reimburse them for fuel costs incurred while making business trips. 45p per mile for the first 10,000 miles is tax-free that an employee can claim for, and after the initial 10,000 miles the rate drops to 25p per mile. Additionally, the employee can claim more relief if they have another accompanying passenger for a business trip. The government allows for 5p per passenger for every mile travelled as a mileage allowance.
What Is A Car Allowance?
Another way to benefit your employees would be to equip them with a car allowance that can be added to their annual salary as a one time increment to enable them to buy their own vehicles or lease one out. However, we advise you to read the complete guide curated by our expert accountants to get a clearer understanding of which option is right for you.
How Does Company Car Allowance Work?
Car allowance is an alternative to company cars and is provided as a one time increment to the employee’s annual income that enables them to buy their vehicles. The employee is then responsible for using that additional amount to purchase a car, as it was intended. However, depending upon the business the receiver of the allowance is a part of, the monetary rewards can go towards the payments on an existing vehicle, the running costs, or something else entirely if they already own a car.
Although there are no hard and fast rules regarding the amounts provided as a car allowance, it depends on the employer’s amount to lease a company car, however, we have observed the rates of car allowance ranging from £150 to £1,000 a month.
Although the rates provided in each industry might differ, these amounts are taken as an average and are not standardised to base a car allowance scheme upon.
A requirement list for employees can also be set up that they would need to adhere to when buying a car for themselves, such as real driving emissions of CO2, the make and model of the car, etc.
Does Company Car Allowance Count As Income?
In one way or the other, yes, car allowance does count as income as it is taxed at the source at your usual income tax rate. However, it is only a one-time payment and would only be added to your annual income for the year you are receiving the benefit.
Tax Liabilities On Car Allowance
The tax liabilities on car allowance are relatively straightforward. As it is an increment in the employee’s annual income, its tax is the same as the employee’s income tax rate. However, this implies that if they are a higher rate taxpayer, they would have to pay a higher tax on their car allowance as their income tax band rate would also apply to this.
For example, if you are an employee that has been granted a car allowance of £9,600, with a monthly increment of £800 for the current year. Now as this has resulted in an increase in your income, if you are a basic tax rate individual you would have to pay 20% on the increased amount of £9,600 as well. If you are a higher rate taxpayer, you would be liable for 40% on this amount as well.
If you are someone with an annual income of £45,000 and you were offered the same amount as mentioned above, you would be liable to pay a higher rate of tax as the increment of £9,600 would make you cross the threshold of the basic tax band and enter the higher tax band.
Benefits Of A Car Allowance
Even though car allowance means more responsibility for employees, they can still enjoy this allowance as it has its own benefits.
Freedom To Choose Your Vehicle
With a car allowance, employees get the freedom to choose a vehicle of their choice, which can prove to be a very attractive incentive for quite a lot of people.
The employee will hold the car ownership, which can come in handy if they want to resell the vehicle to upgrade or get quick cash.
Additional Cash Injection
If they already own a car, they can use the allowance for other purposes besides buying a car.
Finding The Best Option
The employee has the freedom to choose the most suitable financing method for getting a car, such as buying or leasing.
As for some employers, car allowance can be a lot more beneficial than providing the company car.
Employers will not be responsible for providing a car to their employees and will not be liable for its insurance and maintenance.
As the car allowances are paid as a cash incentive, the employers can lower their earnings as a portion of it is given out as the allowance, hence, reducing the taxes owed by them.
Payment Of Expenses
The payment of travel expenses, whether personal or business, will be the responsibility of the employee. However, the employer can provide a mileage allowance as an additional benefit if they so desire.
Tax Debate: Company Car Vs Car Allowance?
Now to answer the question, what would be better, a company car or a car allowance?
Unfortunately, there is no “one size fits all” when it comes to this debate. Before deciding on what to opt for, there are many factors to consider. For example, if you are in a financial pinch, some might say that choosing a company car will save you from implicating your finances further. In contrast, others might think that the immediate injection of cash flow you get from a car allowance would be a better option to bring back financial stability in your life.
Ultimately the best option for employees is the one that saves them the most money. A car allowance would be more beneficial if the employee already owns a car and is in no need of an upgrade in the near foreseeable future; however, if they belong to a higher taxpayer bracket, they might end up losing out on a lot of monetary value which they could have gotten if they had opted for a company car.
We have devised a simple solution to help you figure out what would be more beneficial to you when it comes to choosing a company car or car allowance. To do this, find out the monthly allocation you would get if you opted for the car allowance program. Deduct any income tax and national insurance contributions from the sum and assess if the excess amount is enough to cover your additional commuting expenses such as insurance, repairs and depreciation. If so, then opting for a car allowance would be the most beneficial for you.
How Can Car Allowance Save Money For An Employee?
Suppose you are currently driving a Mondeo 1.6 TDCi Zetec, but you are looking to upgrade from the current model into something more your style, like the BMW 3 series. You bring it to your company’s attention, and after assessing your records, the director decides to provide you with a car allowance of £500 per month to upgrade your car.
Now you get to thinking and are required to do some calculations,
Suppose you are a higher rate taxpayer, charged 40% income tax, and currently pay £145 per month in BiK tax on your Mondeo.
Out of the £500, you will lose £220 to income tax and NIC charges, left with a total spendable allowance of £280 per month. You will be adding this amount to the £145 you would be saving in BiK tax and are left with a budget of £425 to get your car upgrade.
Consider leasing out the vehicle at 12,000 miles per annum, including maintenance and go around looking for quotations. You find a supplier willing to lease out the car to you at £330 per month, including repair and servicing, so your tyres and maintenance are covered. You also decide to get your vehicle insured for £600, adding £50 to your monthly liability.
After comparing the engines and fuel consumption of your new and previous car, you will find out that you’d be burning through an extra fuel tank in a month with the new car, which adds a total of £65 to your monthly expenses.
Looking at past statistics, you can assume that you travel 150 miles per month for business, which will allow you to claim a mileage allowance at 45p on that 150miles, netting you a total of £67.50.
Now the final calculation would come out to be,
As you can see from the above example, after taking out all possible deductions and expenses, you are left with £47.50, which is the additional benefit you would be getting because you opted for the company car allowance over the company car. This is a significant difference.
This is why it is strongly recommended that you look for advice from skilled professionals to help you decide the most suitable course of action for yourself or your business.
Ultimately, whether you opt for a company car or decide to take on the car allowance depends entirely on your financial position, preferences, and requirements. However, we can safely assume that a company car and its tax liability carry their merits and demerits. But, as far as the tax liability is concerned, people tend to choose options that save them the most money. And hence car allowances are a better choice, and with more businesses offering up cash alternatives to company cars, it seems like they understand that as well.
But if you still have any uncertainties regarding the best option for you, look for advice from professional accountants or tax services that would help you find exactly what you are looking for.
Jinesh is a Senior Business Accountant, with a masters in Finance from Westminster University, and specializes in tax and accounting for small to medium businesses with a turnover less than £ 3 Million.
He specialises in helping creative businesses understand and manage their accounting and tax needs and obligations.
As accounting ecosystems evolve, their potential to add value also grows. This has increased the focus on digital solutions to tackle complex business problems. Jinesh helps businesses see the opportunity in this and helps businesses become more efficient and increase performance, using the right solutions.
Some of the key things he focuses on are:
- Helping businesses gain insights from their business data
- Providing complex tax and accounting solutions
- Helping businesses prepare for complex industry developments and changes