Thinking of taking a Cash Allowance instead of a Company Car?

A cash alternative to a company car can be provided in a wide variety of ways.

The most typical arrangement is probably a fixed monthly cash allowance to cover the driver's forecast monthly outgoings (e.g. finance repayments, insurance, maintenance, etc), plus an additional mileage-based amount for fuel used on business travel.

Variations on this type of arrangement include:

• Cash Allowance & Business Fuel:
  The employer pays a fixed monthly allowance and reimburses business fuel costs based on fuel receipts.
  
  
• Cash & Fuel Card:
  The employer pays a fixed monthly allowance and provides a company fuel card.
  
  
• Mileage Allowance Only:
  The employer only pays a mileage allowance for the business miles travelled.

Cash Allowance

There are various methods to set the amount of any fixed monthly payment. Typical approaches include:

• Company Cost: Use the existing cost of providing a company car each year (e.g. depreciation or finance rentals, plus insurance, maintenance and tax disc renewal), then divide this total annual cost into a monthly amount to pay to the employee.
  
  
• Market rate: Apply the amount of the market or 'going rate' practice for car allowances in an industry sector or pay grade. The amount may have nothing to do with the actual costs of motoring; it simply represents the going rate of allowance.
  
  
• Driver Cost: Estimate the amount of the cash allowance that the driver will actually need to be able to pay for the average monthly running costs of the car, either with or without adjustment for the impact of tax and NIC.
  
  

PAYE

Normally the employer will have to operate Pay As You Earn on the monthly cash allowance.

The cash allowance will be treated as pay through the payroll for tax and NIC purposes, however, the employee can claim tax relief for business mileage and in certain circumstances the employee's PAYE tax code can be adjusted to give tax relief via the payroll each month.

If any mileage payments to the employee are paid in accordance with the HM Revenue & Customs' Approved Mileage Allowance Payments ('AMAPS') system or HMRC's Advisory Fuel Rates ('AFR') then some or all of the amounts will be exempt from tax and NIC.

If a fuel card is provided then the benefit of this will be taxable, though the employee should be able to claim a tax deduction equivalent to the AFR rates for business fuel.

PaySwap^tm Cash or Car Calculator

To see a comparison of the business or personal effect of a cash allowance or a company car visit our PaySwap^tm cash or car calculator.