Company cars offer businesses and employees a financially beneficial way to ensure transport for essential car users.
Your business should consider the benefits of company cars before deciding to invest. You'll need to draw up a set of policies and procedures for managing company cars and their health and safety requirements.
Company cars can also be an important tool in reducing greenhouse gas emissions. Low to zero emissions vehicles attract the biggest tax benefits and can help with a transition away from petrol and diesel cars.
Rules around company cars can seem confusing, whether it's calculating company car tax or insurance issues for business and personal use. This guide will help you understand the advantages and disadvantages of managing company cars and look at alternatives such as car allowances.
What is a company car?
A company car is a vehicle which a business or organisation gives to an employee. Company cars can be used for both business and private journeys.
Company cars are well suited for employees who need to drive as part of their day-to-day job. They can also be an incentive when hiring employees.
There is no automatic legal entitlement to a company car - it is a matter between employer and employee.
Company cars are treated as a taxable benefit and you will have to pay company car tax.
The amount of tax will depend on:
- your income tax band
- the value of the car
- its CO2 emissions
Types of company car
There are two broad categories of company cars:
- status cars - for specific grades or positions in the hierarchy
- essential user cars - for certain jobs including sales, or for drivers who travel more than a certain number of business miles per year
Company car models can include:
Company car policies
Whether your fleet is company-owned, leased, or supplied by an agency, you should create a company car policy.
What to include in a company car policy
Your company car policy should include topics such as:
- what types of car to purchase - there may be financial advantages to choosing certain models but there may also be benefits to choosing from a wider range
- setting a CO2 limit on your cars
- putting in place a replacement policy - eg replacing the vehicle after a certain number of years or at a specific mileage
- allowing your employees to trade up or down (within the approved list) with an appropriate salary adjustment
- offering a cash alternative to employees
- offering incentives for employees to switch to other forms of transport
- information on any tracking devices and data handling
Company car approved vehicle list
When you select cars for your fleet, you should think about their safety, environmental performance, cost and suitability for purpose. You can then produce an approved vehicle list that:
- specifies the makes and models of cars currently available
- gives all the New Car Assessment Programme (NCAP) safety ratings and official CO2 emissions for the cars available
- specifies the company car tax implications for each car type
Your employee can then choose from the list of cars and must accept the conditions of your Company Drivers' Policy and sign and return the Drivers Declaration.
You should make it compulsory for all business drivers to submit copies of their driving licences, or use a third party to run a thorough check with the Driver and Vehicle Licensing Agency.
Company car health and safety responsibilities
You have a duty of care to your employees to make sure the cars they drive for work are as safe as possible. You must conduct risk assessments and put a range of policies and procedures in to practice. For more information see HSE guidance on driving at work.
All company cars must achieve a rating of at least NCAP 4 stars and preferably NCAP 5 stars for adult occupant safety.
Company car policy template
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.
What is a grey fleet?
A grey fleet is when private cars are used for business purposes, and employees are paid a fixed mileage allowance.
Benefits of a grey fleet
Private cars may be a more convenient option than company cars, particularly if you have staff who travel short distances or travel infrequently for business.
A grey fleet requires less administration and can be cheaper to operate, but it needs careful management.
Risks of a grey fleet
Grey fleet vehicles are usually older and therefore create higher emissions than a typical company car or daily rental vehicle. Grey fleet emissions are included in calculating your carbon footprint, so you should look carefully at the impact of grey fleet travel on your total emissions.
Grey fleet mileage can be unnecessarily high in some businesses. Many lower cost and convenient alternatives are available to reduce grey fleet mileage.
How to manage a grey fleet
You must make sure that all your grey fleet vehicles are properly serviced, maintained and insured for business use. Before any privately-owned vehicle is used for company business, its owner must provide:
- a copy of a valid insurance certificate including cover for business use
- a copy of the driver's licence
- a signed declaration that the vehicle is fully serviced and maintained to the manufacturer's standards
- a valid MOT certificate for vehicles more than three years old
You should keep good records that relate to your grey fleet. Hold documents on file for 12 months. It is the driver's responsibility to provide updated documentation if they lapse or if the vehicle is changed.
Grey fleet health and safety responsibilities
You have the same duty of care to grey fleet drivers as to company car drivers.
You must ensure that:
- the car is fit for purpose
- the car has a valid MOT (if applicable)
- the car is insured for business use
- the employee has a valid driving licence
When private cars are used for business purposes, they must meet:
- New Car Assessment Programme (NCAP) 4 star rating for adult occupant safety
- Euro 3 emissions standards
- your stated business CO2 emissions levels policy