In the modern world offering your employees vehicle benefits isn’t limited to simply giving them a vehicle to drive, there are a growing number of alternatives and depending on your business one of these could be better for your company than a company car or van.

This guide will explore one of these alternatives – the company car allowance – how your business and employees can benefit from it, tax implications, vehicle maintenance and management and the other thing you’ll need to consider when deciding on the right option for your business.

Company Car Allowance Explained

A company car allowance is a cash benefit scheme that you can offer to your employees.

It will work differently to a company car in a number of ways including; the benefit amount, the tax on it and when it is applied, who is responsible for the vehicle and much more.

As it is a cash benefit your drivers can then choose how to spend the money, whether it is on a lease vehicle, goes towards purchasing a new vehicle or the maintenance and upkeep of a current vehicle that they use for business purposes. This choice gives drivers more flexibility and allows the benefit to be used as best suits the individual.

How Company Car Allowances Work

As mentioned above the car allowance is a cash benefit, and so it is added to your employee’s annual salary and then they choose how to spend it.

Though it’s up to your employee to decide on how the money is spent as their employer you can still place some restrictions on the vehicle make and additional modifications to ensure they are driving an appropriate and safe vehicle.

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

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.

Business Benefits of Company Car Allowances

Car allowances are becoming more popular across UK businesses for a reason – they offer companies a large range of benefits.

The first and most obvious is that the driver is responsible for sourcing their own vehicle and for the maintenance and upkeep of this. This includes paying the road tax, insurance, regular servicing and maintenance, MOTs and any other costs associated with the running of a vehicle.

As the driver is responsible for all of the admin on their own vehicle this means that the level of fleet management needed is reduced, saving you time and money.

Financially, there is the benefit that your business is only responsible for the cost of the allowance and so will only have to make the monthly, or annual depending on how you choose to pay the benefit, amount.

Also, as any finance agreement will be in the driver’s name you will not be liable for any additional charges, such as exceeding a mileage allowance, early termination or damage upon return fees, or balloon payments at the start / end of an agreement.

With a company car allowance, you can still set restrictions for the type of vehicles and modifications that are allowed under the benefit so you will still be able to prevent a driver from opting for an impractical model, for example if they chose a two-seat sports car when they need a vehicle they can regularly transport multiple clients in.

What Are the Benefits for Your Drivers? 

While there are a lot of benefits for the business with a car allowance there are also benefits for your employees. The main benefit is that a car allowance allows them the freedom to choose what they spend it on. They can use the allowance to lease or purchase a new vehicle or if they have an existing vehicle that's suitable then they can use the funds to maintain the vehicle and pay associated costs. 

Company Car Allowances and Tax

As the car allowance is a cash benefit that is applied to their annual salary it will be taxed at their normal income tax rate.

This makes it a little easier to calculate the tax on it as you simply include the amount with their salary and do not need to do any additional calculations just tax it at the same rate as the rest of their salary.

You will not need to use a specialised calculator as you would for a company provided vehicle.


Offering Company Car Allowances

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

We mentioned at the start of this guide that there are other ways of funding and offering car benefits to your employees – head back to our vehicle supply guides to see all the other options available to you including the company car, and the funding methods available for you other than outright purchases including leasing or car rental for short-term needs. 

Will Drivers be Taxed on Their Company Car Allowance?

Yes, a company car allowance is considered a benefit so will be taxed as part of your employee's salary. You should make sure your employees are aware that as it is a cash benefit there will be tax to consider when they decide if they want to take a car allowance. 

What is Company Mileage Allowance?

Company mileage allowance is something you can offer employees, it will cover the associated costs for using their vehicle on business travel, this includes: 

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

This will only be payable if the employee is using their own vehicle, so it will be something to consider when deciding if a company car allowance is the right choice for your fleet. 


Contact Wessex Fleet