Personal Finance FAQs

Q) What are the pros and cons of alternatives to company cars?
A) There are three main alternatives to providing employees with company cars, each with distinct pros and cons.

1) Optional cash allowance

How much should we pay? Many employers operate a system of company cars or a cash alternative. The employer may have a matrix of cash allowances for different grades of employee.

Any cash allowance will be subject to PAYE and National Insurance and the employer will specify whether the cash allowance is pensionable or non-pensionable.

Employees will normally be able to change from a company car to cash allowance on the same cycle (i.e. three to four years) as they might change the company car.

Depending on the level of the cash allowance, the employer is likely to reimburse mileage at a rate based on the cost of fuel only. Additional tax relief will be available on the difference between the Inland Revenue Authorised Mileage Rate (IRAMRs) and the amount paid.

Generally such allowances tend to favour perk car drivers who may only occasionally require a car for business purposes. As the cash allowance will not be tailored to the employee's business mileage, they are unlikely to be suitable for all high business mileage drivers.

2) Mileage payments

Some employers may require the employee to provide their own car for business purposes and reimburse business mileage only. The most tax efficient way of doing this is to use the Inland Revenue's Authorised Mileage Rates. These rates are calculated to include an allowance for depreciation, insurance, maintenance and fuel costs and may be paid to the employee free of tax and national insurance, provided the employer has an Inland Revenue dispensation.

Some arrangements are mainly used by smaller companies, who do not want to operate a car fleet, and will normally suit employees with a travelling appointment and guaranteed high business mileage.

3) Employer Sponsored Personal Contract Purchase

One of the drawbacks of simple cash allowances is that the employee is offered no assistance in obtaining a company car. This has tended to lead to inertia among employees in taking up a cash allowance. In order to counter this, employers have combined the provision of cash allowances with an introduction to a third party who will provided a PCP option to employees.

For employers, the introduction of a PCP provides a low or no cost option. PCP arrangements offer the employee the benefit of fixed cost motoring and the potential access to bigger corporate buying power to use alongside their cash allowances. For employers, the introduction of a PCP provided is a low or no cost option to enhance the value of a cash allowance. The provision of PCP arrangements may also be extended to employees who would otherwise not be entitled to a company car.