Currently reading: Which is best: company car or car allowance?
There are several ways your employer can help get into a new car, and each has its pros and cons

If your job involves a lot of driving, it might also include a car to help you get around.

As the name suggests, a company car is leased or owned by your employer, who will also cover insurance, maintenance and other running costs to keep it ready for work use. However, it’s typically also available for you to use out of hours.

What are the advantages of a company car?

Company car tax is heavily weighted based on CO2 emissions, with large incentives for vehicles rated at less than 50g/km – which covers most plug-in hybrids and all electric cars.

Choose carefully and monthly benefit-in-kind (BIK) tax payments could be cheaper than buying or leasing privately. You will also get a new car every three or four years, won’t have to worry about unexpected bills and can hand the keys back to your employer if you change jobs.

Autocar's company car tax calculator, showing exactly what you will pay for each and every make and model

What are the disadvantages of a company car?

It’s common for company car policies to have caps on vehicle price, CO2 emissions and optional extras to keep a lid on running costs, and some also limit drivers to specific brands and bodystyles. Even if you’re eligible for a company car, you might not be able to choose what you want or need.

Cash allowances

Some employers will let drivers opt out of a company car scheme and take a cash allowance instead. This is a lump sum added to their salary to buy or lease something privately, and it has become more popular as diesel penalties and the usually higher WLTP-derived CO2 emissions have hiked up company car tax almost across the board.

What are the advantages of cash allowances?

The world is your oyster. A cash allowance lets you shop like a private buyer, choose whatever car you want, upgrade to a new one whenever you like and take it with you if you change jobs.

Cash allowances are treated as part of your wages, so you will pay income tax (usually at a rate of 20% or 40%) and National Insurance Contributions on them. However, if you need something with quite high CO2 emissions, such as a tow car or MPV, tax costs could be lower than paying BIK as a company car driver.

What are the disadvantages of cash allowances?

As a private customer, you’re responsible for keeping up the monthly payments, making sure the car is properly insured and maintained for work use and sticking within the mileage limits of your finance contract. Cash allowances have also become less attractive since HMRC renewed company car tax incentives for low-emissions vehicles last year.

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Salary sacrifice schemes

Salary sacrifice makes some of the advantages of company cars available to those who aren’t eligible to have one. Employers offering these schemes will lease a car for you, usually including servicing, maintenance and breakdown cover, but (unlike a company car driver) you then sacrifice some of your monthly wages to pay them back for doing so.

What are the advantages of salary sacrifice?

Unlike a cash allowance, salary sacrifice lets you access your employer’s buying power and discounts, so lease costs are usually lower than what you would get if buying privately.

There are tax advantages, too. As long as the car emits 75g/km CO2 or less, it will be taxed as a benefit-in-kind based on its CO2 emissions, and you won’t pay income tax or National Insurance on the salary you’ve given up. Because electric and plug-in hybrid cars fall into ultra-low tax bands, salary sacrifice is a very affordable way to get one.

What are the disadvantages of salary sacrifice?

Tax rules for salary sacrifice schemes changed in 2017, which effectively limits your choice of vehicles. If you opt for a car which emits more than 75g/km CO2 (and that includes pretty much everything that you can’t plug in), you will either pay BIK tax or be taxed on the salary you’re giving up – whichever is higher. So the advantages really only apply to the lowest-CO2 models.

Alex Grant

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