From Company Car To Cash   

   From Company Car To Cash   

5 Key Steps

If you're an employer looking at offering a cash alternative to company cars or already focussed on switching to a 'grey' fleet then we have some practical advice to help take you through the process.

So where do you get started?

Well, we think there are 5 key steps to switching from company cars to cash allowances, so our guide below explains how to follow those steps to an implemented cash allowance.

If you just want to know how much cash you need to pay, use our cash or car calculator to do the maths for you.

And if you're a company car driver wanting to know what to do then click here to read our driver's guide.



    Step 1: Calculate The Cash   

    Step 1: Calculate The Cash   

Step 1: Calculate The Cash

Even if you have just one company car driver, calculating the cash allowance required to swap out of a company car is not a step to be undertaken lightly.

You'll need to calculate in monthly terms:

  • The employee's running costs for swapping to a personal car, including finance and depreciation, servicing and maintenance, insurance, breakdown cover and fuel.
  • The personal tax and national insurance changes from taking cash instead of a company car.
  • The gross cash allowance required to leave a net allowance that will cover the car running costs.
  • Adjustments to the cash allowance to compensate for extra taxes/NIC or clawback tax/NIC savings (if that's how your policy will work).

Remember that the costs the employee incurs may not be the same as the costs you have currently.

For example, employees may not get the same car price discount and finance rate you get, but may pay less for individual insurance than you pay for fleet insurance (assuming they have a good no-claims history).

Fortunately there are calculators available to do the hard number crunching for you - you can take a look at our cash or car calculator by clicking on this link, so once you've quantified the cash allowance required you can then move on to Step 2.

Now, you might be wondering why you have calculated the cash allowance before deciding whether or not to go ahead.

Well, that's because you need to know the cost of what you're planning to do before you get started - it could make or break the proposition.

Which leads to ....

    Step 2: Profit or Loss?   

    Step 2: Profit or Loss?   

Step 2: Profit or Loss?

There are typically two key reasons for implementing a cash alternative to company cars;

  • cost savings compared to providing company cars;
  • improved offerings for recruiting/retaining staff.

However, no matter which point is the prime motive for your business offering a cash allowance, probably the most important impact is likely to be from the cost.

In other words, will a cash allowance save your business money on operating your fleet or will it cost more and, if so, could any cost increase be offset by sufficient enhancements to employeer recruitment, retention and motivation to make it worthwhile?

It's beyond the scope of this article to answer the last point - it's so subjective that HR practitioners, consultants and employees will all happily engage in hours of debate on the pros and cons, so we're going to concentrate on the quantifiable impact of a switch to cash.

How To Quantify Costs

Assuming you've already followed Step 1 and calculated the cash allowance then you'll need to:

  • Calculate the employer's national insurance cost of the cash allowance.
  • Decide whether or not the allowance will qualify for benefits such as pensions, etc, and the associated cost.
  • Identify the net business cost impact of a swap to cash after changes to business tax relief and recoverable VAT on cash compared to company car running costs.

You'll need to do this for every level in your existing company car plan where you aim to provide cash allowances.

Multiply the individual cash allowance cost per company car at each grade by the number of employees eligible for a car at each level.

The resulting number is your maximum cost impact of a change to cash and your highest cost-risk point, i.e. if everyone eligible for a company car decides to take a cash allowance instead.

Also factor into the calculations the cash-flow impact of switching from company cars to cash allowances, particularly if you buy your company cars outright.

This is because swapping to an allowance can provide provide a significant cash-flow improvement compared to buying outright, with an effect similar to switching to leasing (but without the corresponding impact on your company balance sheet).

Once again our cash or car calculator will take you through this.

    Step 3: Create An Offer   

    Step 3: Create An Offer   

Step 3: Create An Offer

If your employees haven't purchased cars previously, particularly new cars, you will need to consider whether you will:

  • introduce your employees to your existing company car provider;
  • engage a specialist company in the field of providing employees with cars through cash allowances; or
  • let employees make their own arrangements for cars, finance, maintenance and insurance, etc, and just provide the cash to do it.
Each approach has pros and cons; in particular, if you become involved in the car supply arrangements or finance you may find that this complicates the tax and employment law position for employees, so check with your professional advisers.

For employees likely to use their cash allowances to acquire a car for business use you may need restrictions or conditions on:

  • The types of vehicles chosen (e.g. do you need 4 doors for access, a lockable boot for equipment/samples/goods, will you prohibit 2 door cars or particular fuel types, etc).
  • The age of vehicles chosen (will they need to be acquired from new or can employees buy nearly new or used?), and when should they be replaced (age/mileage).
  • Maintenance - is a full service/repair history required for used cars?
  • Will ongoing maintenance/MOTs records be produced to you for all vehicles?

You'll now need to put together an offer to your employees. How you do this will depend on:

  • the current employment contract position of your existing company cars; and
  • whether your cash allowance proposals will leave employees neutral in comparison to a company car or better/worse off.

Here are some typical ways of providing a cash alternative:

  • A fixed monthly cash allowance to cover depreciation, maintenance and insurance, with a mileage allowance just for fuel costs (or a fuel card or reimbursement of fuel costs on production of receipts).
  • Just a mileage allowance, covering all running costs and typically in line with HMRC authorised rates.

We recommend that, unless your business has HR specialists with the right technical knowledge, you speak to your company employment lawyers about the changes you propose.

This is to ensure the cash allowance offer you make complies with employment legislation, particularly if employees have a contractual right to company cars and/or other related benefits (such as free private fuel) and you are planning to replace this with a cash allowance arrangement.

In addition, you need to ensure that the offer also complies with the complex rules on employee taxation where company cars and cash become interchangeable - your tax advisers will guide you on this.

Ensure that your offer is documented appropriately and communicated to eligible staff; also consider bringing employee representatives into the process of formulating the cash allowance offer.

Irrespective of the scope of the cash allowance offering you will need to decide and communicate how the offer will be structured, e.g. will employees have:

  • A one time offer to swap to cash, with no way back to company cars for those who do accept and no future offer of cash for company car drivers those who don't take the offer.
  • A recurring offer which will be available each time an employee's car is due for replacement or periodically for those who take cash (beware of the tax implications of this).
  • A compulsory switch to cash as each employee's company car comes up for replacement (beware of the legal implications of this).

    Step 4: Transition The Change   

    Step 4: Implement Change   

Step 4: Transition The Change

When you're ready to start implementing a cash allowance you'll need to manage the transition out of company cars. Consider carefully the pace at which employees who have opted for cash can:

  • decide on a car - the employee's decision may take much longer if car policy restrictions are removed, or simply because the employee is choosing a car which (s)he will actually own or lease;
  • apply for finance and set up a maintenance contract (or some other means of evidencing regular servicing and repairs); and
  • get personal motor insurance (the cost of which will fluctuate with the employee's choice of car).

All of this may take much longer for employees than it would take for your business, especially as the employee is now at risk for the car itself.

Look carefully at the documentation you will want to see evidencing:

  • employee ownership of the car or other entitlement to use it for business purposes (e.g. leasing company permission);
  • motor insurance cover for busines use (particularly if you require employees to transport samples or goods);
  • proper on-going care and servicing of the vehicle, plus breakdown cover, current MOTs when applicable and, of course, driving licences.

Make sure you have procedures in place to manage and monitor all of this and, possibly, sanctions for non-compliance by employees.

    Step 5: Monitor and Review   

    Step 5: Monitor/Review   

Step 5: Monitor And Review

Swapping to a cash allowance doesn't absolve you of your responsibility for ensuring the safety of your employees when driving on company business.

This means you will still have a duty of care to your employees on business travel and must prove that you have exercised due diligence in monitoring the condition of vehicles used on business motoring.

So, you'll still need a means fo verifying on a regular basis that cars used on business motoring comply with the law, including being:

  • taxed;
  • insured;
  • maintained in a roadworthy condition, including having a valid MOT certificate where appropriate.

Put in place a feedback process for employees who take cash to provide information on issues related to running their own car. You should at least consider monitoring:

  • ease of employee access to finance, maintenance and insurance and any problems encountered with these;
  • car usage behaviour - e.g. does the swap to cash promote employees using their cars less and taking public transport or using other means of communicating with customers/suppliers;
  • actual employee costs of motoring vs projected costs and cash allowance - you'll need to ensure employees are not disadvantaged by the change for morale/motivation/employment law purposes.

And finally ...

    And Finally ....   

    And Finally ....   

And Finally ....

Swapping to a cash allowance is only the beginning.

As with any part of your business environment you'll need to refine and enhance the package in response to:

  • changing business conditions;
  • employment and tax law revisions; and
  • employee behaviour in response to living with the cash allowance.

Not least you'll want to check that the cash allowance delivered what you set out to do at the beginning.

Remember too that this article is focussed on the key steps in switching company car drivers to cash allowances.

There's a lot more detail to be covered when you embark on the process, so check all available sources of detailed information and analysis at every stage.

Don't be afraid to ask for help!

Contact Us

Whether you're a personal buyer, fleet operator or company car driver we have the most advanced tools you could ever need to help you choose your next new car or van.

From vehicle technical data to advice on buying or leasing, it's all here waiting for you.

So dive right in, or why not get in touch?

You never know what else we might know ....

   0333 444 0400

(+44 1792 224319 from outside the UK)


0330 444 0400
(+44 1792 224319 outside UK)

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