An employer’s guide to car allowance
A company car can be a real luxury for both the business and employees. They’re a great perk to help recruit staff—and to help retain them too!
In some cases, a car allowance is an absolute necessity. Today, staff members need to travel further than ever for work purposes as face-to-face interactions are so critical in business—and Zoom calls simply don’t cut it.
Whatever your reason may be for getting a company vehicle, it’s worth knowing what car allowance is and how it works. From understanding the calculations for an employee's individual car allowance to the potential tax benefits, it can help minimize any complications that come with company cars and managing a car allowance policy.
In this guide, we’ll give you all the knowledge needed to take advantage of car allowances in relation to company cars for business use.
What is a car allowance and how does it work?
A car allowance is a sum of money that the business adds to the employee’s annual salary—allowing them to either buy or lease a vehicle.
Whether your employee/s buy a car or lease it is something that can be discussed between the company and the employee in question. It’s typically the employee who sources the vehicle themselves.
There are pros and cons to both buying and leasing employee cars. When buying a company car, you’re benefiting from insurance costs decreasing over time but you’re paying out a lot of money to buy the car upfront.
For leasing a car, there’s a small to non-existent down payment but insurance rates may end up being higher to cover gap insurance.
Car allowance is also for helping the employee with car running costs, as well as insuring it and getting it checked over for maintenance. Car allowance is separate to mileage allowance and this is something you may also want to consider alongside your car allowance program.
As a car allowance is given to the employee to buy their own personal vehicle, they can claim a mileage allowance on top when using this car for work purposes. A car allowance can help to cover fuel costs in general but claiming a mileage allowance on top is good for business.
What does car allowance cover?
Before giving an employee a car allowance for their own car, it’s useful to know what it covers so that you’re giving your employee a realistic allowance.
Driving costs are essential to be aware of when it comes to how much you offer. The cost of fuel, according to mBurse, makes up around 17% of the overall costs to operate a vehicle.
If the car is necessary for work and not just for personal use, then there will likely be a certain amount of mileage expenses needed. This covers any driving that’s work-related and can vary in cost depending on the mileage and the type of fuel consumed.
Wear and tear
Every car experiences general wear and tear, so it’s usually included within the car allowance— to help cover anything that needs a quick fix or some general TLC. For example, this could be replacing tires when they’ve worn out or become compromised, to fixing small dents, bumps, or scratches to the car.
There are other maintenance costs that can crop up every now and then such as replacing brake pads, oil changes, and more. These are all critical to keep maintained in order to improve the overall health and longevity of the car.
Insurances, taxes, and depreciation costs
In the scenario that an employee needs the car for work purposes, then insurances need to be reimbursed as well as depreciation costs. All cars face depreciation to some extent and taxes are inevitable for most things we pay for in life.
What is the average car allowance amount?
The average car allowance amount can vary depending on a number of factors—such as the employee and their position within the company. It can also be influenced by how much the vehicle is used for business and where the car will be located.
For example, a survey mentioned on eReward, found that the average car allowance differs from one employee level to the next in the UK. These are:
- £10,300 for company heads (directors and executives)
- £8,200 for senior management
- £5,200 for sales representatives
- £4,600 for professionals
In the US, the monthly average is around $575, which comes down to $393 after taxes come down.
Regardless of how much allowance a business provides, it’s important that there’s a car allowance clause in the employee’s contract. Just like any other benefit or agreement made between the employer and employee, it’s necessary to put this in writing.
How to calculate car allowance for employees
The above averages may be helpful for estimating car allowance amounts, but how do you calculate your own employee’s car allowance?
As mentioned above, the cost of fuel, maintenance, taxes, and reimbursements all influence how much the car allowance will be. Here’s a step-by-step process to make calculating your car allowance easier so that it’s not time-consuming or a hassle to do.
1. Use a tool like FuelEconomy to calculate fuel costs.
There are many tools and softwares available online to calculate your fuel costs. One worth using is FuelEconomy. It’s great for estimating fuel costs over a certain amount of time, whether it be daily, monthly or yearly.
2. AAA for car repair estimates.
The AAA is an established repair and maintenance company, providing emergency repair assistance to those across the USA. You can use their site to roughly estimate the car repair costs that might be needed—whether that’s the MOT or general servicing. It depends on the car in particular.
3. Use a comparison site for car insurance.
Car insurance can vary greatly from one company to another and depends on what you want covered. It’s important, as a business, to protect yourself as much as possible. Using a site like CarInsurance.com can be helpful for finding what prices are available and what each one covers individually.
This might differ depending on the driver’s experience on the road, where they’re located, and other car expenses like the amount of business miles or fuel types.
4. Calculate depreciation and other fees.
And finally, make sure to consider depreciation in a vehicle too. This is one of the biggest expenses and differs depending on the type of car the employee picks. Whether it’s a new vehicle or used, as well as any damage that occurs and the amount of mileage it accrues over time.
There are plenty of free depreciation calculators online to utilize, such as this one.
Understanding mileage rates for car allowance
Mileage is the amount of distance the car covers over time and mileage rates are something that are necessary to consider.
Unlike a car allowance where you’re paying a certain amount for the car and its maintenance, mileage is usually a reimbursement that covers the cost of fuel as well as any wear and tear that may occur. The amount of CO2 emissions produced can also influence the charges on the vehicle.
Mileage rates in the UK
According to HMRC, for UK mileage rates, you can claim over 45p tax-free as a private mileage allowance. These rates differ depending on the vehicle and tend to be updated quarterly—so make sure you keep up to date. For example:
- Petrol with engine sizes of up to 1400cc are 11p per mile.
- Diesel with engine sizes of up to 1600cc are 9p per mile.
HMRC has a full list of advisory mileage rates, which is worth checking out to calculate what you can offer to your employees.
Mileage rates in the US
In the US, the IRS allows claims of 56 cents for business vehicles in 2021, as opposed to 57.5 cents offered in 2020. There are also differences for vehicles used for charity and medical moving purposes.
You can see the standard mileage rates for the US on the IRS website.
These mileage rates are important for businesses when trying to get a clearer overview of necessary costs. There’s also a difference between providing auto allowances vs mileage reimbursements. A mileage allowance, unlike the car allowance, is tax-free—worth considering when making your decision.
The differences for a company car vs car allowance
There are differences between providing a company car to your employee as opposed to giving them a car allowance. Which one is more beneficial or cost-effective?
The responsibilities when it comes to company cars vs car allowance differs. For car allowance, it’s the employee’s responsibility for sourcing the vehicle and maintenance. In the case of a company car, the employer is responsible.
With a car allowance, the car purchased doesn’t belong to the company, whereas a company car does. There are pros and cons to each and it’s up to you to determine which option is best for your business needs.
For example, if your employee is given a company car and no longer needs it, there’s then the task of finding someone else in the company or selling it. On the other hand, a car allowance means the employer can limit their involvement in finding and maintaining the car.
There’s also taxes to consider as company cars can incur heavier tax payments than offering a car allowance. It’s certainly worth calculating the tax payments in relation to a car allowance and paying less tax.
So, is a company car or car allowance the best fit? Ultimately, it’s up to the company to decide what’s best for business. Company cars may be best when solely used for business, whereas a car allowance may be more suitable for those who will use the car privately too.
Pros and cons of car allowance
Just like all business expenditures, it’s worth weighing up the pros and cons to dishing out car allowance. With that being said, here are some of the advantages and disadvantages.
The Pros of a car allowance
A car allowance is relatively easy to set up and calculate, as mentioned above. A major benefit of car allowance is that it is easier for employees and can help save time. The setup of said system is straightforward and once in place, you can simply add and remove car allowances as and when needed.
By providing an allowance for a car, your staff can have their own vehicle to travel to work. Not only that but there may be travel needed for work that is easier to get to via car than via public transport.
For car allowances, you also don’t need to track mileage and deal with business expenses, unless you offer mileage on top.
The Cons of a car allowance
Setting a car allowance amount might be more challenging when it comes to your individual employees. Some may be deserving of more allowance but at the same time, you want to ensure fairness for everyone within the organization.
Not all employees will need a car, and those that do may vary greatly in the mileage needed for work. It’s finding that happy medium that can often be the difficulty. Keeping your workforce happy and, more importantly, valued is critical. Without it, you may find your staff are more inclined to leave—which isn’t great for business.
It really depends on what your business requires and can afford to provide, every company’s finances differ.
Car allowance: frequently asked questions
With a better understanding of how car allowance works, we’ve got a few frequently asked questions that often crop up when it comes to the topic of car allowance.
Is car allowance taxable?
When it comes to car allowance, in the UK you’re taxed at the regular income tax rate for the employee in question. This can vary depending on what tax band they’re in.
In the US a car allowance is taxable unless you track the business mileage and prove that the allowance doesn’t exceed the IRS business mileage rate of 56 cents per mile (rates as of 2021).
Does company car allowance count as income?
A company car allowance is seen as a cash allowance and added to the employee’s annual salary on top. It’s a taxable income and is deducted from the salary just like national insurance, etc.
Again, there are tax deduction options available depending on how much the vehicle is used for business purposes and how much is for personal use.
As an employer, can I take away my employee’s car allowance?
As an employer, it depends on the terms and conditions that have been agreed upon in the contract of employment. It’s beneficial to ensure terms are laid out in this contract from the offset. That way, if it’s necessary, you can remove the employee’s car allowance without too many issues.
There’s a lot to consider when it comes to car allowance as a cash alternative for business so make sure to do your calculations correctly. By doing so, you can maximize the effectiveness of this benefit and enable your employees—and your business—to go places.