A guide to vehicle allowances
Giving employees a company car is a great incentive, but it helps to know where you stand with vehicle allowances.
To help you understand a little better, we’ve put together this simple guide to vehicle allowances.
If you’re growing as an organisation, you could soon be in a position where you’re able to offer staff company benefits. These could include things like health insurance, travel expenses, and childcare. One perk that proves particularly popular with employees is a company car.
There are many tax rules and regulations you need to be aware of when you offer vehicles as part of a company’s benefit package, so we’ve put together a guide that answers all the most frequently asked questions about vehicle allowances.
What is a company car and what is a company car allowance?
As part of a company benefit scheme, you can offer employees their very own vehicle – which is paid for by the business. This is known as a company car and is often valuable to staff who need to travel in order to conduct business. By doing this, your workers don’t have to purchase a car themselves.
Most company owners give members of staff what is known as a company car allowance – essentially a pot of money which they can use to finance their company vehicle. This allowance is added to the employee’s annual salary, and the employee is free to use this money to buy any car they like.
This gives staff a sense of control, and the employer does not have to handle the vehicle finances throughout the year.
With each company vehicle also comes policies around fuel allowances, with many business opting for a company car fuel card for fuel expenditure.
Do you pay tax on a car allowance?
In the UK, company cars play a key role in employee benefit packages. The company will provide a vehicle and pay for all maintenance and upkeep, including tyre changes, oil changes and more – meaning the employee doesn’t have to worry about the many costs associated with running it.
If an employee prefers not to use a company car however, they have the option to take the cash alternative for the vehicle – this is called car allowance. The choice is dependent on an employee’s individual circumstances and whether they would benefit from having a company car.
A car allowance is a one-time cash sum which an employee can use to purchase a personal vehicle. There are no restrictions to which car your employee chooses, although an employer can set minimum specification requirements such as vehicle age, C02 emissions, number of seats and more.
A car allowance may be a better option for an employee if:
- You already own a car and don’t need to upgrade
- You have a specific car you’d like to buy
- You want an asset which can be sold at a later date
Your car allowance is taxed at an employee’s personal income tax rate. This means that, if an employee is a higher rate taxpayer, they’ll be paying 40% tax on the allowance. As such, the amount of cash they end up with after tax could be significantly lower than the value of a company car.
The best way to figure out if it's worth having a company car is by using the Company Car and Fuel Benefit Calculator on gov.uk. Here, employees will be given two tax liability figures – one for the 20% tax bracket and one for 40%. For employees who are not sure which tax bracket applies to them, the latest thresholds are published on gov.uk.
What is the mileage allowance?
Mileage Allowance Payments (MAPs) are what you pay your employee for using their own vehicle for business journeys. You’re allowed to pay your employee a certain number of MAPs each year without having to report them to HM Revenue & Customs (HMRC). This is called the ‘approved amount’.
To calculate the ‘approved amount’, multiply your employee’s business travel miles for the year by the rate per mile for their vehicle.
Use HMRC’s MAPs working sheet if you need help.
What is the P11D value of a car?
When dealing with company cars and taxable benefits, you’ll inevitably come across a P11D form. HMRC requires employers to fill in these P11D forms and include the cash equivalent values of all benefits and expenses that have been supplied during the tax year.
Calculating company car tax involves using a set formula. It considers several factors – such as the car’s value, its CO2 emissions and personal tax rates.
First, you need to take the company car’s P11D value. This is its list price, including VAT, along with any other delivery charges. It doesn’t include the car’s registration fee or annual Vehicle Excise Duty (VED) figure. You must be sure to include the provision of a company car available for private use.
You’ll then need to multiply the P11D value by the vehicle’s company car tax rate – a percentage – which is set based on its CO2 emissions. These percentages change every year, which is why company car tax needs to be recalculated annually. It’s also important to note that diesel cars face a 4% surcharge on top of the base percentage for their band.
The number you now have is called a Benefit in Kind (BIK) value. To then calculate the amount of company car tax payable, you need to multiply this BIK value by your personal income tax rate, as a percentage.
For employers managing fleets of vehicles, P11D is used to determine Class 1A National Insurance contributions, whereas employees use P11D to work out the Benefit in Kind tax liability of their car.
What is a taxable benefit in the UK?
The employer is responsible for taking the tax owed on company cars from the employees’ wages through the Pay As You Earn (PAYE) system, and is also responsible for determining the value of these benefits.
For staff, tax and National Insurance is charged on benefits that are paid in cash. This is because they are treated as earnings.
There may be further benefits and possible tax incentives available with a company car fuel card.
Do you pay NI on taxable benefits?
Benefits paid by other means are not subject to National Insurance charges for employees. Instead, the employer is responsible for working out and paying these contributions – and this is something worth remembering when you’re operating a fleet.
You might have to deduct and pay National Insurance on payments relating to relevant motoring expenditure (RME), which includes:
- Mileage Allowance Payments (MAPs)
- Payments that would be MAPs, but are paid to a person other than your employee, for your employee’s benefit.
- Any other cash payments you make to your employee towards the use of their vehicle.
A certain amount of RME will be exempt from reporting to HM Revenue and Customs (HMRC) or paying National Insurance on. This is called the ‘qualifying amount’.
Keep your fleet costs under control with Allstar
Keeping track of your business fleet costs is extremely important, which is why having an Allstar fuel card is so worthwhile. We can provide a wide range of fuel cards for all kinds of company cars, helping you keep your fleet costs under control.
Not only does a fuel card system let you keep business travel expenses separate from all other transactions, it also offers you access to lower fuel prices across leading supermarkets. Our Supermarket+ fuel card is ideal for SMEs, giving access to the biggest low-cost stores, like Asda, Tesco and Sainsbury’s.
Every single fuel card payment is transferred into an HMRC-approved invoice, so you don’t have to worry about creating and formatting tax paperwork from scratch. With Allstar, your invoices are ready to go at a moment’s notice.
Get in touch with the Allstar team today on 0345 266 5101 for more information about vehicle allowances.