Company cars

Car allowance or company car?

Guide

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.