Years ago, a company car was seen as a massive incentive towards taking a new job. However, recently many employers have preferred to offer a car allowance which could prove more financially beneficial to both you and the firm. So when presented with the two options – a company car or a car allowance – which should you choose? This guide will examine the pros and cons of both.
The company car system is long established in the UK. When you join a company, your new employer may offer you a company car as a perk – this means that you will drive a vehicle that the company owns.
Let’s look at the advantages of taking a company car:
The main disadvantage to company cars is that car owners can now be heavily taxed based on the type of vehicle they drive, as the following section will explain.
Prior to April 2002, company car owners paid tax based on the number of business miles they drove each year. Now however, the system is calculated based on the quantity of carbon dioxide emissions from each vehicle – fewer emissions mean less tax.
As larger vehicles are typically used by firms to carry goods, they are subject to high taxation as traditionally larger vehicles pollute more.
To work out the level at which you will be taxed you must take into consideration a number of factors:
To help reduce the tax level of your company car, the solution is to get a more environmentally friendly vehicle. Smaller cars and particularly hybrid cars and electric vehicles are featured in lower tax bands – with the most environmentally friendly cars facing no tax charges as well as being exempt from congestion charges. The Inland Revenue publishes a table listing the tax bands for vehicles – bear in mind these can change after each budget.
An alternative is to use an LPG converter on your vehicle to reduce emissions – of course this can only be carried out if your company owns the vehicle, and not if they are leasing a car.
Many people now prefer a car cash allowance rather than a company car – this means driving your own vehicle and receiving a mileage based cash incentive from your employer. This is known as the Inland Revenue Authorised Mileage Rate (IRAMR).
The good news is that these allowances are tax-free. There are two rates based on the fact that some driving costs are variable (such as fuel) and others are fixed (insurance, tax, etc). The payments are 45p/mile for the first 10,000 miles and 25p/mile thereafter. There is no size restriction – these benefits apply whether you drive a small car or a van.
As with most aspects of driving this choice depends on your personal circumstances.
The key to calculating the most cost-effective route is to think about the monthly car allowance being offered to you. Once you have done this deduct any National Insurance contributions and tax, and add in the tax saving of not driving a company car.
Compare this to driving a company car and think about whether the money you have left will allow you to cover your remaining motoring costs including insurance, repairs, depreciation. Also factor in any fuel benefit offered on your company car.
The option that saves you the most money will usually be the preferred route for most. However, look beyond cash too and consider whether you want to have the security of owning your own vehicle or whether you prefer to drive a company car to avoid the expense of depreciation, etc.
It’s all about personal choice and which factors matter the most to you.
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Eastern Western Fleet Services
Edinburgh's Luxury Car Village
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