Employee vehicle benefits don’t need to be limited to simply providing a vehicle to drive. There are a growing number of alternatives.

This guide will explore one of these: the company car allowance. You’ll discover how your business and employees can benefit from it, tax implications, vehicle maintenance and management, and more.

Company car allowance explained

A company car allowance is a cash benefit scheme you can offer your employees. It works differently to a company car in a number of ways including; the benefit amount, the tax on it and when it’s applied, who’s responsible for the vehicle and other considerations.

As a cash benefit, drivers have the flexibility to choose how to spend the money; whether on a lease vehicle or towards purchasing a new one. Some even choose to spend it on the maintenance and upkeep of a pre-existing vehicle they drive for business purposes. It can also be used for public transport.

How company car allowances in the UK operate

The allowance is added to your employee’s annual salary and though it’s up to them to decide how the money’s spent, as their employer you can still place some restrictions on the vehicle type, make and modifications to ensure they’re driving an appropriate, safe vehicle.

If you offer a car allowance instead of the use of a company car, you’ll need to calculate a reasonable cash allowance for your employees. This may vary depending on their job role and seniority in the business. There are currently no government guidelines on how much a car allowance should be in the UK.

The cash benefit will be added to their annual salary and you can pay this as part of their monthly wage or in one bulk payment. It’s important that the allowance amount, driver and business responsibilities are in the employee’s contract so that all parties are aware of them.

Company Car	Car Allowance
Best for frequent travel, client-facing employees	Best for travelling shorter journeys or using varied transport
Owned or leased by employer	Owned or leased by employee
Employer pays any upfront costs	Employee pays any upfront costs
Maintenance and insurance are the employer’s responsibility	Maintenance and insurance are the employee’s remit
Employee pays Benefit-in-Kind (BIK) tax; employer may pay higher tax costs depending on vehicle	Lower tax liability for employer; treated as taxable income for employee
Vehicle choices are limited to the ones the company offers	Employee chooses their own vehicle or even public transport
Employer controls vehicle image with vehicle signage if desired	Less branding opportunities for employer
More admin for employer (fleet management, servicing, insurance)	Simpler administration for employer
Employer is hit by depreciation and resale	Employee bears the financial risk instead

Business benefits of company car allowances

Car allowances are popular across UK businesses because they offer companies a range of benefits.

They save employers time and money, since the driver’s responsible for sourcing their own vehicle and for the maintenance and upkeep. This includes paying the road tax, insurance, regular servicing and repairs, MOTs and any other costs associated with the running of a vehicle, reducing the level of fleet management needed.

Your business is only responsible for the cost of the allowance and won’t be liable for any additional charges, such as exceeding a mileage allowance, early termination, damage upon return fees, or balloon payments at the start / end of any finance agreements, which will all be in the driver’s name.

Remember duty of care

Something to bear in mind when choosing a company car allowance is that although the driver’s responsible for the maintenance of their vehicle, as their employer you will still have a duty of care to them. This means that you still need to ensure that the vehicle’s in line with general safety standards.

Good to know…

A car allowance is generally worth it if your drivers want the freedom to drive any vehicle they choose and prefer a simple, predictable monthly cash addition, but is not worth it if they clock up massive business mileage or want to avoid paying high income taxes on the benefit.

Do drivers pay tax on a car allowance?

As the car allowance is a cash benefit applied to annual salaries, it will be taxed at the employee’s normal income tax rate. Employers simply include the amount with their salary without any additional calculations; just taxing it at the same rate as the rest of their salary. You won’t need a specialised calculator or tool as you would for a company provided vehicle.

What’s company mileage allowance?

Company mileage allowance is something payable only to employees using their own vehicles to cover the associated costs on business travel, including:

• Fuel / electric charge
• Oil and other fluids
• Maintenance
• Insurance
• Road tax
• Vehicle depreciation