Cash or car? That’s the one question CBVC Vehicle Management is asked most frequently: “Should my employees operate a company car or should we offer a car tax cash allowance?”
Cash or Car?
Why the debate? Why are both employers and employees considering the benefit of a cash allowance over a company car?
The main reason has been the escalating levels of benefit in kind company car tax paid by drivers. Cars that were once considered ‘tax busters’ have now become ‘tax generators’ for HMRC.
Cars once considered low emission now find themselves towards the top end of the company car tax tables.
This has been exacerbated by the introduction of WLTP methods of measuring the fuel consumption and CO2 emissions of cars. For company car taxation purposes, WLTP takes effect from 06 April 2020. In many cases, it will see the CO2 emissions of some cars jump by as much as 30%.
All of which pointed towards the cash option as a more tax-effective solution. For employers there is a reduction in Class 1A National Insurance Contributions; and for employees there is less tax to pay.
Nevertheless, the introduction of new tax tables for 2020/21 has derailed the move towards cash.
These new tables offer plenty of incentive for fleet drivers to choose an Ultra Low Emission Vehicle (ULEV) – a car that has CO2 emissions below 75g/km – or a zero emission car.
Indeed, electric vehicles that have zero emissions will be taxed at 0% in 2020/21; at 1% in 2021/22; and 2% until 2024/25.
Why such largesse from HMRC?
The reason behind the incentive is that the government wants to encourage drivers into ultra low emission vehicles to meet its stated aim to ban all petrol, diesel and hybrid vehicles from 2035.
It suddenly makes the cash or car question more relevant – and tips the balance back towards fleets retaining the company car.
Cash or Car? Factors you should consider
The factors that need to be considered in the cash or car calculation are these:
- What are the P11d and CO2 emissions of the car?
- How much cash allowance are you prepared to offer?
- What is the employee’s salary?
- Where is tax paid; in Scotland or the rest of the UK?
- What capital contributions or payments, if any, are made for private use?
- When does the contract start? This is important to ensure the correct BIK rates can be applied over the correct tax years.
- How much will the total contract payments cost?
- How many miles in total will be covered during the contract?
- How will this split between private and business mileage?
- How much will the driver pay for insurance including business use cover?
- What free private fuel, if any is provided?
- Which business fuel reimbursement rate is used, AFR or AMAP?
- What is the actual fuel consumption of the car (mpg) likely to be?
- Would it be better to provide a ULEV company car where the driver takes advantage of lower company car tax rates?
- Should you offer company car drivers EVs where appropriate to benefit from the generous tax allowances on offer?
- Should a driver contribute towards the higher rentals of an EV if they are benefiting from zero tax on their zero emission company car?
Deciding whether a company car or cash allowance is the more cost effective is not as straightforward as calculating whether extra salary, net of tax, is a better option than the benefit in kind tax payable on the company car.
CBVC Vehicle Management has developed a calculator to compare how much it would cost a driver using the same car:
- As a company vehicle
- With Personal Contract Hire.
CBVC Vehicle Management research has found that frequently employers have been giving too generous an allowance when compared with Personal Contract Hire deals currently available.
Note that paying an allowance to an employee using their own car does not remove the employer’s Duty of Care for managing the vehicle.
Contact us on 01283 351200 to discuss if you would like us to work out if cash or car is better for your business.