Car allowance or company car?
Businesses can offer employees a car allowance as an alternative to a company car. There are important differences for businesses and employees to consider when operating a car allowance system.
What is a car allowance?
A car allowance is a cash amount paid directly to an employee's salary. An employee can use that money to buy or lease a car directly, instead of using a company car which is managed through the business.
Car allowance drivers are expected to be able to provide a car for company business at all times.
Advantages of car allowances
A car allowance offers greater flexibility in car choice and to eventually own the car. Advantages of car allowances include:
- a cash allowance added to your annual salary
- freedom to choose a financing option which suits you
- the option to finance a car you will eventually own
- taking your car with you if you leave employment
- you can claim a mileage allowance from your employer
Disadvantages of car allowances
A company car can offer some savings and protection from unexpected costs that a car allowance doesn't. Disadvantages of car allowances include:
- responsibility for maintenance, insurance and servicing costs
- having to pay income tax on your monthly car allowance
- higher annual mileage may incur higher costs
- the burden of having to record business mileage
- the risk of a lengthy financial commitment if employment is not secure
- if you own the car, you will be responsible for selling it
You should carefully assess the financial implications before deciding between a car allowance and a company car.