Been given a company car cash allowance?
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Should you take a cash allowance instead of a company car?

In the UK, company cars have long played a key role in employee benefits packages. As a visible demonstration of success, with the benefits of hassle free motoring, they have been used to attract and retain high calibre people for many years.

But in recent years, the tide has turned.  People love choice. Whether mobile phones, clothing, gym memberships or cars, we live in an age where we expect choice and value. In some cases, company car schemes provide this but many are more restrictive.

So what should you consider if you are a company car driver reviewing your options?

Taking the company car

First and foremost, how important is the car in your job role? Some employers will insist you have a company car if you're a high business mileage driver. They have a duty of care to ensure you're safe whilst driving. Providing you with a company car helps them deliver that greater level of security, knowing your car has been serviced and is of a reasonable age and condition.

However, if you use your car simply to  drive to and from the office every day, a company car may not be your best option. There are pros and cons to having a company car. Let's look at them:

Pros of the company car:

  • New car every three or four years
  • All servicing and repairs paid for
  • Company pays for insurance
  • Roadside recovery included
  • Better fuel costs from lower consuming cars
  • No need to use your own cash or get finance

Cons of the company car:

  • Choice is often limited. You may not be allowed convertibles, SUVs or manufacturers you particularly like
  • You pay more tax. A company car will typically add £800-£3000 to your annual tax bill depending on its CO2 emissions
  • If your circumstances change during the contract you cannot easily change car to reflect your needs
  • If you move to a new job without a company car or lose your job, you  lose your car
  • You will not build a no-claims bonus for insurance purposes

 

Ultimately only you can decide if the company car is the right option for you. The major consideration is; 'Will my cash option enable me to drive the car I want?'

How is the cash option calculated?

Your employer will calculate how much they're currently spending on your company car and then provide a similar amount to you. They will also calculate how much employer tax they pay on your car, what basic rate of tax you pay and finally whether they are looking to incentivise the taking of cash allowances.

Once you know the gross amount to be added to your salary, you can calculate how much you have to spend. Bear in mind that you not only have to finance a car but also insure and maintain it.

Can I use my car for business?

This is ultimately down to your employer's policy on company travel. Most companies are happy for employees to use their own vehicles for business as long as business insurance is included in the driver's motor insurance policy. There may also be restrictions on the maximum age of the car you can use. You will need to ensure that the vehicle has a current MOT if over three years old and tyres are legal.

If you use your car on business, you will normally be paid Government Approved Mileage Allowance Payments (AMAPs) to compensate you for those additional miles. Currently this pays 45p per mile for the first 10,000 business miles per annum you drive and reduces to 25p per mile thereafter. If your employer does not pay the full amount (they are not legally obliged to do so), then you can claim the difference when completing your tax return. It is important that you keep detailed records of your journeys both for your employer or any tax return claim.

How can I finance my new car?

A new car is extremely expensive and most people do not have or don't want to spend £15-25,000 of their own money on a depreciating asset.

There are numerous ways you can finance your new car. If you want to own the car, the simplest options are a bank loan or hire purchase (HP) agreement. Once you've paid all of the HP monthly instalments, the car is yours to keep.

You can also consider personal contract purchase (PCP), which gives you an option to own the car at the end of your contract. You can do this by paying a lump sum based on the vehicle's residual value (you'll know how much this will be at the start of your contract). This value is calculated by taking the period you want the contract to last and the total mileage you are likely to cover in that time. It's important to be as accurate as possible when predicting your mileage. You cannot change mid-contract and if you exceed your predicted total, you will be charged an excess mileage rate based on an agreed pence per mile.

If you're not bothered about owning the car, you could consider personal contract hire (aka personal leasing).  Like PCP, it offers lower repayments than a bank loan. You pay a deposit plus fixed monthly amounts, and hand the car back at the end of the term. Again, get your mileage prediction right otherwise you will pay excess mileage.

To find the right PCP or personal lease, you need to decide how much mileage you are likely to travel per annum, how long you want to keep the car for and whether or not you want maintenance included. You also need to be clear how much money you can afford for the deposit.

Now you know the different elements to consider when deciding to take cash or car, you can run some calculations that will tell you whether a cash allowance is a costlier option and if so, whether it's one you are prepared to pay.

Here's a good example:

Mike is currently driving a Mondeo 1.6 TDCi Zetec Business Edition 5dr. Whilst he likes his company Mondeo, he has always wanted a BMW 3 Series. His company offers a cash allowance and as his car comes up for renewal, he decides to look into it.

The company offers him £475 gross increase in salary per month to opt out of his company car.

Mike now does some calculations.

He is a 40% tax payer and is currently paying £136 a month in benefit in kind tax for his company car.

Of his £475 allowance he is going to lose £200 in tax and NI so his net spend will be £275. He adds this to his £136 a month tax saving and so has a budget of £411 a month to finance, insure and maintain his car.

Mike shops around for a competitive quote on a BMW 320D M Sport 4dr Step Auto. He doesn't want to buy or own his new car so he compares personal lease rates over four years at 12,000 miles per annum that include maintenance. He chooses a supplier who can provide the vehicle at £350 per month (remember this also includes maintenance so all of his servicing, repairs and tyres are covered). He gets an insurance quote of £600 (this includes business use so that Mike can drive occasionally to suppliers or his company's office in Manchester). This adds £50 a month to his monthly car expenses.

He also compares fuel consumption. The BMW has a combined mpg of 62.8 and the Mondeo 67.3. His calculation tells him he will use one extra tank of fuel every month if he takes the BMW which will cost him, at current prices, £65.

Mike will cover about 150 miles a month in business journeys. At 45p a mile in AMAPs, this means he will receive, on average, £67.50 a month.

Ultimately he chooses to take the cash allowance and lease a new BMW. His final calculation showed the following:

For Mike, the idea that he can drive a new BMW 3 series and not be out of pocket, is a temptation too large to avoid.

Use the calculations above as your template and hopefully you too can come to a clear decision – should you stay in your company or take a cash allowance?

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