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Cash or Car Allowance?

It can be difficult to decide whether to take a cash or car allowance when given the choice by your employer. There are benefits and draw backs to each option.

Company Car Allowance

Your employer finds and funds a vehicle for you to use as a perk of the job. They generally pay all the expenses for maintenance, insurance and rental of the vehicle. There is usually a limited choice of vehicles to choose from and any extra factory options are paid by you if the price goes above their budget. You do not own the vehicle so if you leave your job the car goes back to your employer.

Some employers will pay for your private miles that you drive in the vehicle and some won’t. It can actually cost you more if your employer pays for your private mileage because of the Fuel Benefit charge you are liable to pay (benefit tax applies to company vehicles you have been given to use and private mileage allowance given to you by your employer). Fuel Benefit charge will be explained in more detail further down.

Benefit in Kind Tax (BiK)

When you are given a company vehicle it is classed as a benefit and taxed accordingly. Bear in mind that Private fuel allowances are also classed as a benefit.

BiK is based on the following factors:

  • The vehicles’ CO2 output the lower the CO2 the lower the tax
  • The price of the vehicle again, the lower the price the lower the tax
  • Your tax bracket - this will affect what percentage of benefit tax you pay based on the above two factors

Private Fuel Benefit charge is based on the following factors:

  • £22,600 for 20017/18. This figure is determined by the government as a scale to calculate your BiK, you pay a percentage of this figure based on the below two factors
  • The vehicle’s C02 output, the lower the CO2 the lower the tax
  • Your tax bracket will affect the percentage of Fuel Benefit charge you pay based on the above two factors

Cash Allowance

Your employer can give you a cash allowance for you to spend on a vehicle to use for business and private driving. They will allocate a monthly or annual amount that you can spend on or contribute towards a vehicle. You can choose the vehicle you want or in some cases the employer will give you a list of acceptable cars that they have chosen to be suitable based on size, environmental impact or even image.

A benefit to this method is that the vehicle is in your name, so if you leave the company you can keep the vehicle and pay the rentals/payments up to the end of the contract or pay a fee to cancel and hand the vehicle back. With this method you are responsible for arranging maintenance, servicing and insurance.

Another thing to consider is that your income will increase and therefore your tax will too, this needs to be considered when deciding on how much you are willing to spend on your new vehicle.

If you would like to get an idea of how this tax would apply to you then try our Car and Fuel Tax Calculator to see for yourself. Feel free to get in touch with us for more information.

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