Company car or car allowance?

Published by Sandra Smith on

Company car or car allowance?

Being able to offer your employees extra benefits is a fantastic way of recruiting and retaining a team. A company car or car allowance is a great incentive, but which is the best option?

A company car scheme can provide a hassle-free way for your employees to have access to a car without the administrative burden of owning a car. The cost to your business will depend on the types of journeys your team are making and if you own or lease the vehicle. You will need to consider the cost of fuel allowance. If you do offer a company car to your team, you will need to pay company car tax known as Class 1A National Insurance Contributions (NICs). However, you are exempt to pay company car tax if you are a partner of a partnership, a self-employed sole trader, a LLP, a charity, embassy, local or government authority.

If the company car is business use only, the business will not need to pay company car tax. If there is a mixture of business and personal use this is seen as a ‘benefit in kind’ and you will have to pay Class 1A NICs. The current rate of this is 13.8% of the value of the benefit.

Whilst a car allowance will mean purchasing your own car, this does allow your employees the freedom of choosing the exact car that suits their needs. There is no company car tax liable on a car allowance, instead employers pay NI contributions on the vehicle at the employee’s personal tax rate.

Going electric

A more cost-effective way to provide a company car is to look at supplying a fully electric company car. The resulting taxable ‘benefit in kind’ is extremely low. The 2022/23 tax year will see the benefit coming in at just 2% of the vehicle’s list price. For example, if you purchased an electric car for £30,000 the resulting ‘benefit in kind’ would be £600. In comparison a petrol-powered car with emissions over £100g/km would cost £1,500.

There are further tax benefits to your business with a reduction in Class 1A NIC contributions and if the vehicle is purchased outright the business can write off the full cost value against profits.

As we all look at methods of becoming more environmentally sustainable, providing an electric car is a fantastic way of reducing carbon footprints whilst taking advantage of the addition tax savings.

At Clear Vision Financial Management, we specialise in providing an outsourced finance function. We love becoming an integrated part of your business and you will benefit from the experience of a wide team from Finance Director level through to Bookkeeper. Find out more about our outsourced Finance department.

If you would like a chat about how we can help you with our outsourced finance department, please get in touch with the friendly Clear Vision Financial Management team. You can call us on 01794 330025 or email us 

ICAEW Authorised Training Employer CIMA Practising Certificate Holder Xero Platinum Partner AAT Licensed Accountant Cyber Essentials