What IS a car allowance?

[Searider]

Evening all,

First off, I've never had a "car allowance" or a company car and have always been paid the govt mileage rates, currently 45ppm op to 10000 then 25ppm thereafter.

I hear lots of talk of £350 pcm car allowance rather than supplying a company car.

I can understand a company offering a company car and setting a monthly maximum lease cost and I can see how the employee is then actually taxed on the car as a BIK.

But what actually is a "car allowance" in lieu of a company car. Is it assessed any differently tax / NI / pension / bonus / overtime wise to regular salary? Does the company usually insist that you spend the allowance on buying a car?
if not, it seems a little pointless to say "we'll pay you £40k per year plus a car allowance of £4k", rather than simply saying, "we'll pay you £44k"?

Is there an advantage to the employer or employee for a certain amount of salary being called a "Car allowance". I run my own Limited company so am effectively the employer and also one of the employees. If there is a benefit I'd like to know!

Cheers.

[pherlopolus]

It is taxed as salary, but not included in calculations when a benefit is a % of salary ie. pensions

Edited by pherlopolus on Sunday 14th December 12:44

[a7x88]

I suppose it's less of a tie for the employer - i.e. It would be easier to change/amend than a salary, would not be counted in any redundancy calculations, not subject to an annual % pay rise (if applicable), employer pension contributions of x% of salary would not include this figure, I imagine the list goes on...

For the employee it is essentially just an extra amount of income as you still pay Tax and NICs on it and the car is not a BIK.

[Sheepshanks]

Searider said:

Does the company usually insist that you spend the allowance on buying a car?

Yes - and many impose restrictions on the age and type of car.

I guess another reason (in addition to previous answers) for separating it is that some employees on the same band (even if it's an informal band) may be "car heads" and some may not.

Also if you merge it into salary then over time it'll get forgotten and people will resent using their own car "for nothing".

[Matt UK]

pherlopolus said:

It is taxed as salary, but not included in calculations when a benefit is a % of salary is pensions

Bingo. Although I'll add that in some companies it is salary that must be spent in a certain way against a set criteria ie age / type / mileage of car.

[Searider]

pherlopolus said:

It is taxed as salary, but not included in calculations when a benefit is a % of salary is pensions

Ah, so it's beneficial to the company, not the employee.

[Searider]

Sheepshanks said:

Also if you merge it into salary then over time it'll get forgotten and people will resent using their own car "for nothing".

Hmm,

So it's almost a way of leading the employee into thinking they are getting something when, actually, they're not!

[Sheepshanks]

Searider said:

Ah, so it's beneficial to the company, not the employee.

Well, if they provided a car then the value of that wouldn't count towards pension, overtime etc.

[Searider]

Thanks all.

It's what I thought it was.

Misleading is what it is!

[mwstewart]

Sheepshanks said:

Searider said:

Does the company usually insist that you spend the allowance on buying a car?

Yes - and many impose restrictions on the age and type of car.

Mine doesn't so I take the cash and use it as I do the salary. I'm not an essential user - the car is a perk of the level I'm at - so perhaps the restrictions apply in roles where a car is essential?

[Sheepshanks]

Searider said:

Hmm,

So it's almost a way of leading the employee into thinking they are getting something when, actually, they're not!

Don't follow?

There's a couple of ways of looking at it - it's a nice benefit as it enables you to choose (with some restrictions) your own car. Or it's compensation for giving up your company car (or having it taken off you).

[Condi]

mwstewart said:

Sheepshanks said:

Searider said:

Does the company usually insist that you spend the allowance on buying a car?

Yes - and many impose restrictions on the age and type of car.

Mine doesn't so I take the cash and use it as I do the salary. I'm not an essential user - the car is a perk of the level I'm at - so perhaps the restrictions apply in roles where a car is essential?

This too, for me. Just goes into the pot. For a long while I was running a car I could have bought for 3 months car allowance, nobody cared as long as it worked (which often it didnt!)

[TooMany2cvs]

Searider said:

Misleading is what it is!

No, not really. It's exactly what it says. It's an allowance payable for you to provide a car, instead of providing a company car.

[phib]

Searider said:

Thanks all.

It's what I thought it was.

Misleading is what it is!

I guess it depends on how much the car allowance is, it works for some but not for all.

I gave my guys big allowances as it saved me having big value metal sitting about when one of them left and the next person didn't want.

I could be really struck on it but I have young guys who are car nuts working for me so they love it

Phib

[Bonefish Blues]

...and there are lots of roles where a car allowance is expected, so building it into base salary would be counterproductive for the employer.

[northandy]

Searider said:

Hmm,

So it's almost a way of leading the employee into thinking they are getting something when, actually, they're not!

Erm not really it depends on the scheme. I do about 2,000 business mikes a year but my allowance is £580 a month. On the car scheme I'd get a basic ish seat Leon or golf. There's no restrictions if I take the allowance so I can buy whatever I want.

[JQ]

Searider said:

pherlopolus said:

It is taxed as salary, but not included in calculations when a benefit is a % of salary is pensions

Ah, so it's beneficial to the company, not the employee.

It is beneficial to the employee because they don't pay BIK. Try getting a big 4x4 or V8 petrol as a company car and you'll soon realise the cash allowance is also beneficial to the employee.

[Funk]

I could never find a way to make a 'car allowance' work over being in the company car scheme when I was in it. Seemed a lot of risk (and exposure to expense!) to run a vehicle in my name with the meagre amount the company were willing to put in.

Benefits of company car scheme:

• no upfront cost (ie. no deposit required)
• servicing included
• high-mileage not an issue (try getting a cheap lease on a reasonable car for 25k miles a year..!)
• hire car if mine was off the road
• ad-hoc repairs included (a run-flat on a BMW could easily swallow up the entire car allowance after tax for a whole month)
• if I leave (or get asked to leave!) I hand back the keys and walk away
• insurance included

Downsides:

• usually restrictive (diesel, sub-2.0, 4/5 seats etc)
• not normally 'spec-able' to a higher level

The company I worked for had a reasonable 'Car Ownership Scheme' which gave the benefits of a company car without the actual hassle of running one yourself (ie. no BIK etc) but it was still quite restrictive as the 'allowance' hadn't increased in the 8 years I was there, meaning you either had to top-up the amount more and more to get something decent or get the bottom-of-the-range basic boggo shopping trolley.

[kambites]

Does an employer pay national insurance on a company car allowance?

I've always treated mine exaclty the same as my salary; it's nowhere near worth taking a car since I'd never buy my own car new. The total running costs of both of our cars combined is less than my allowance.

[Sheepshanks]

kambites said:

Does an employer pay national insurance on a company car allowance?

Yes. They do on company cars too.