Why more employers are choosing cash over a company car

Have you ever been given the choice of receiving a company car or taking the cash equivalent? Until fairly recently, it made good financial sense for both employers and employees to take the car option.

Tax incentives were in place to make it even more attractive to select an environmentally-friendly car as the taxable Benefit In Kind (BIK) is based on the car’s CO2 emissions.

However, diesel cars were initially hit with a 3% surcharge over and above petrol equivalents, which now stands at 4% (for cars not reaching the RDE2 standard), increasing the (BIK) for the employee and National Insurance charges for the employer.

Some critics argue that it doesn’t add up, environmentally, as for years we were encouraged to buy diesel cars which produced less pollution yet now there is little financial incentive to do so compared to non-diesel alternatives.

So, the environment aside, what are the pros and cons of taking a company car as opposed to the cash?

Company car

Pros:

• It’s often less stressful – admin is taken care of by the employer’s leasing company
• Insurance is covered, and often breakdown costs too
• You choose from modern cars offering the latest technology
• No need to worry about selling the car at the end of a lease

Cons:

• You have no asset, so receive no cash when you hand the car back
• There are fewer car options and choices are dictated by the employer/lease company
• If only diesel cars are available, you could be penalised by the 4% surcharge

Taking the cash

Pros:

• You can spend it on what you like; it doesn’t have to be a car!
• You’ll have an asset to sell and can realise some cash at the end of the car’s use
• You’ll get far more choice over what car you can drive (although your employer may specify a ‘standard’)
• It should work out cheaper at the moment based on current surcharges

Cons:

• You’ll need to budget for all costs, including tax, insurance, maintenance etc
• All admin and running of the car is your responsibility
• You could be committed to a purchase/hire agreement if your employment comes to an end

Employers should also be aware that if they offer employees a choice of either cash or company car, they could be subject to Optional Remuneration rules which can further complicate issues. We are seeing more companies giving staff no choice in the matter in order to simplify and streamline their tax position.

If you would like to discuss your company’s tax position with respect to company cars, or for advice on employee benefits, please contact [email protected] or call 01527 558539. We offer a full range of personal tax and employer tax services.

company car taxation