If you’re being offered the choice between a company car, and company car allowance, which is the better option? There’s no easy way to answer this question, as it will depend on a number of factors, but to help you start considering your options, we’ve explored the topic in further detail below!

What’s the Difference Between Car Allowance and Company Cars?

While getting a company car or a car allowance would be considered a great perk by just about any employee, there is definitely a difference between the two! As the name suggests, a company car is where your employer allows you to use one of the vehicles from their fleet. 

A company car allowance, on the other hand, is where the business you work for gives you money, on top of your regular salary, that is intended to be used to finance a vehicle. This could be buying or leasing a car, or the money could simply be used towards the running and upkeep of your current vehicle.

The main thing to remember is that while you’ll be responsible for keeping the vehicle in good condition with both options, the responsibility of payments and running costs for a company car lie with your employer, whereas these things would be your responsibility with a car allowance.

Benefits of Car Allowance

When it comes to the advantages of car allowance, people often appreciate how flexible it can be. You can choose your own vehicle, and in most cases, decide how you wish to split the allowance. You can additionally determine whether you’d prefer to buy or lease a car, or just use the allowance for an existing vehicle.

Essentially, a company car allowance is a flexible cash sum that you can spend towards buying or maintaining a vehicle. You’ll probably get this allowance every month, at the same time you receive your wages, and can then work out where the money would be most useful, such as on fuel, repairs or contributing towards car insurance.

Benefits of a Company Car

There are a number of benefits to having a company car. Perhaps the main advantage is that it tends to work out much cheaper than running your own vehicle. There are costs involved, such as Benefit in Kind (BiK) tax, which is a tax rate applicable to employees who receive substantial perks on top of their normal wages. But this is unlikely to be on par with how much you’d spend on a vehicle yourself.

Another advantage of being offered a company car is that there are no unexpected costs. If something were to go wrong, such as the battery needing replacing or needing a new exhaust, this should be covered by your employer. The same goes for regular maintenance and servicing expenses. You might even be entitled to a fuel allowance, depending on company policy.

Other benefits involve the vehicle itself. You’ll almost certainly get to drive a modern, luxurious car, as most company cars are updated every few years. You also won’t have to worry about the vehicle depreciating in value, as you won’t actually own it. This additionally means that you're not tied into a finance agreement.

Limitations of Car Allowance and Company Cars

In terms of the limitations of a company car allowance, it does mean that the finance for the vehicle will be your responsibility. Everything will be under your name, so even if you stop working for the company offering this benefit, you’ll still be responsible for all vehicle payments. The running costs of the car will furthermore need to be managed by you, including fuel.

Another thing to consider with car allowance is how much you’ll receive, as the amount can drastically vary. And because the allowance is taxed at source, if you’re a higher rate taxpayer, you may end up paying more than if you had a company car.

Some may argue that the biggest disadvantage of a company car is that you have to give it back when you no longer work for the business. And if you leave fairly abruptly, you may not have time to save towards a deposit for your own car. So unless your next employer offers a similar benefit scheme, you may have trouble getting from place to place.

Other limitations of a company car include being unable to choose your own vehicle. While the model of car is bound to be nice, if you’re used to driving smaller vehicles, for example, it may be a bit of an adjustment to start driving a big saloon car. Having a company car can furthermore be expensive in terms of taxation. BiK tax can really add up if you’re driving a top of the line car, and you may even have to pay fuel benefit tax.

Should I Choose a Company Car Or Car Allowance?

If you’re lucky enough to be given the option between a company car and company car allowance, the main things to keep in mind are your current financial situation, the company vehicle you’d be offered, and your estimated mileage each year. In terms of the former, if you’re worried about money, getting car finance in your name could add to your stress. So a company car may be the better choice.

When it comes to the company car on offer, if it’s a low emission vehicle, such as an electric car or hybrid, that will probably be a sensible option. But a gas-guzzler can mean higher BiK tax, so you may wish to opt for the allowance.

If you drive lots of miles, you might want to think about a more economic vehicle, and consider how much you’d be spending on fuel. Overall, it’s a good idea to calculate which is the cheaper option - a company car, which may not have an allowance too, or topping up the contributions of a company car allowance. Ultimately, it will depend on your individual circumstances.