COMPANY CAR FUNDING
Alternative ways for a driver to fund their company car
The most common method of funding a company car has historically been through the payment of Benefit-in-Kind taxation. This is straightforward for the employee as payment is generally deducted from their salary by their employer – the employee doesn’t need to do anything. Costs associated with the car such as servicing and maintenance, insurance and breakdown cover are all paid by the employer making this a very easy way to run a company car.
There are other ways that a company car can be funded though.
As Benefit-in-Kind rates have increased year-on-year, a growing number of businesses have chosen to offer their employees a car allowance as an alternative to a company car. As a company car driver this can appear to be an attractive option as it means there will be no uncertainty around future changes in Benefit-in-Kind taxation rates. It could also mean having access to a much wider range of vehicles, though some employers may place some restrictions to ensure that the vehicles remain fit for the job function.
Employees choosing this route will generally be paid a mileage allowance to cover the cost of fuel used for business trips as well as the other costs that will increase as a result of using their own car for business, such as servicing, business-use insurance and increased contract hire rates. HMRC recognises these increased costs and has set Approved Mileage Allowance Payments (AMAPs) that drivers can receive without being liable for income tax. You can find out more about AMAPs in our Fleet Knowledge area.
Drivers considering this route should keep in mind that they will be responsible for the maintenance of their vehicle, its insurance and servicing costs and, if it’s sourced through Personal Contract Hire, any costs for damage or excess mileage. For many drivers it will be worth staying with a traditional company car, even if it costs a little more in tax, to avoid these extra responsibilities.
A final thing to consider is that, should the driver change jobs, a company car can simply be handed back to the employer. A Personal Contract Hire car remains the responsibility of the driver, who will have to either maintain the monthly payments or cover any early termination fees contained within the contract.
Salary sacrifice is an established facility where employees can enjoy the benefits of a company car even though their job role may not require them to travel. As the name suggests, to do this the employee agrees to give up a part of their salary in exchange for the car. The amount of salary the employee is required to sacrifice is usually set at a level where the employer covers the cost of supplying the car. The employee will then also pay Benefit-in-Kind tax on the car in the same way as any other company car driver.
Prior to April 2017 the amount of Benefit-in-Kind tax payable was calculated on the basis of the P11D value of the car. However, since this date the tax calculation has taken the amount of salary sacrificed into consideration. Where the amount of salary sacrificed is greater than the taxable benefit of the car, tax will be payable on the amount of salary sacrificed. An exemption has been made to this for ultra-low emissions cars with CO2 emissions of no more than 75g/km – these will continue to be taxed on the basis of their P11D value.