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The Advantages and Disadvantages of Company Cars and Car Allowances
A company car and a car allowance are two popular forms of employee compensation to pay for a vehicle for sales and other business meetings.
A company car allows an employee to drive a car owned and maintained by the company. In contrast, a car allowance provides employees with a designated monthly amount to cover their car-related expenses.
Both options have advantages and disadvantages, and the right choice for an individual will depend on their needs and lifestyle.
A company car offers convenience, as the employee does not have to worry about the associated costs of owning and maintaining a car, while a car allowance gives the employee more freedom to choose the vehicle they want and customise it as they please.
However, a company car can be more expensive to the employer, and a car allowance may be subject to higher than necessary taxation.
Ultimately, the decision between a company car and a car allowance will come down to both the employee and employer’s individual needs and preferences.
Benefits of a Company Car over a Car Allowance
- Potential Tax Advantages: Company cars are generally exempt from certain taxes, such as VAT and National Insurance Contributions, which can be a huge benefit to employers and employees alike.
- Improved Employee Morale: Employees who receive a company car may feel more valued, which can improve job satisfaction. Additionally, employees may perceive a company car as a benefit, which can lead to better engagement and loyalty.
- Reduced Travel Costs: Company cars can also reduce travel costs for an employer since they don’t have to pay for travel expenses or mileage reimbursements. This can be particularly beneficial if the employee travels long distances to meet with clients.
Disadvantages of a Company Car
- Expense: Company cars are expensive for businesses to purchase, maintain and insure.
- Liability: If a company car is involved in an accident, the business can be held liable if it is determined that the employee was at fault if on company business. This could result in expensive legal fees, damage awards and if there was a fatality, Corporate Manslaughter.
- Corporate manslaughter: A criminal offence in the United Kingdom, which applies to organisations rather than individuals.
The offence was introduced in 2008 by the Corporate Manslaughter and Corporate Homicide Act 2007 and applies to organisations with a gross negligence-based form of corporate killing. The offence is committed when an organisation, through the way in which it manages health and safety, unintentionally causes a person’s death. For instance, if the tyres are below the minimum tread levels, the company could be liable for an accident.
To be found guilty of corporate manslaughter, an organisation must be proven to have acted with gross negligence. This means that the organisation must have breached its duty of care to the victim to such an extent that it has been grossly negligent and that this negligence was the cause of the victim’s death.
The potential penalties for a conviction of corporate manslaughter include large fines and/or prison sentences for senior managers and directors of the organisation. In addition, the organisation can be ordered to publish details of the offence, which can cause reputational damage.
- Tax Implications: Depending on the value of the car, the company and the employee could be subject to tax implications.
- Personal Use: With a company car, there is a risk that employees may use the car for personal purposes, which could lead to increased insurance premiums or even a breach in policy.
- Maintenance: Regular maintenance and repairs are required to keep a company car running in good condition. This can substantially add to the cost of operating the vehicle.
Benefits of a car allowance over a company car
Cost Savings: A car allowance eliminates the cost of purchasing, maintaining and insuring a company car. This can result in significant cost savings for the employer.
Flexibility: A car allowance allows the employee to choose the car they want to drive. This can be a great benefit for employees who want the flexibility to choose their own vehicle. Most firms have a policy on what cars are allowed to be used to represent their business.
Easier to Monitor: It can be difficult for employers to monitor the use of company cars. A car allowance is easier to track, as the employer can simply check the employee’s expenses to ensure they are making a mileage claim based on business travel-related trips.
Easier to Modify: A car allowance can easily be modified or stopped if needed. This is not the case with a company car, as the employer will be stuck with the cost of the car until it is sold or the lease ends.
Disadvantages of a Company Car Allowance
Expense: Company car allowances can be expensive for employees, especially if they have to pay for the full cost of the vehicle.
Tax Implications: For salaried employees employed on a PAYE basis, they will still need to pay tax and National Insurance. In addition, Employer National Insurance Contributions still apply. There are car ownership schemes on a ‘salary sacrifice’ basis that can help mitigate high tax costs.
Full Guide to Car Versus Car Allowance
Date published: 26th Feb 2024
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by Darren Dewrance
Founding Director
About the author
Darren Dewrance
Darren spent six years in sales and field sales before joining the original sales recruitment specialist, Austin Benn, in 1998. After achieving the status of top consultant, out of about seventy at the time, Darren rose from Senior Consultant to Operations Manager of the commercial sector before leaving to join a London based Headhunter in 2003 before setting up Aaron Wallis with Rob in October 2007.
With a natural leadership style, Darren is an expert on putting his finger right on the heart of the problem. His natural commercial instincts have helped hundreds of employers make better recruitment decisions. Darren is married with two children, and when not at work or with his family, he likes nothing more than to be on the side of a river or a lake with a rod in his hand.
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