In this weeks Ask LCM, we will be looking at the difference between a car benefit vs car allowance.

Car benefit vs car allowance

Car benefit vs car allowance

One of the common benefits an employer can offer its employees is the use of a company car.  But there is also the option of a car allowance.  In this article we will quickly look at both, as well as some of the advantages & disadvantages of each.

Car benefit

With a car benefit, the employer provides the employee with a physical vehicle.  This is commonly a car but may also be a van. 

No cash payment is made to the employee.

Please note that there are slightly different rules for vans than cars.

This vehicle is then treated as a Benefit In Kind (BIK) on the employee and taxed accordingly.

The key benefit here for the employee is that they do not pay National Insurance Contributions (NIC) on the benefit.

Instead, they will only suffer income tax on the benefit.

However, that doesn’t mean that NIC isn’t payable.  Where a BIK is provided, the employer suffers NIC instead of the employee.

The disadvantage here for employers is that there is more administration to complete.

A BIK must be reported to HMRC.  This can either be done via a P11D or the car benefit can be payrolled.

However, you can only payroll a car benefit if you notify HMRC before the start of the tax year.

The key advantage for the employer is that they have total control over the type of vehicle purchased as well as having legal ownership over that vehicle.

Car allowance

However, a car allowance works differently.  One of the key advantages of a car allowance is that it is much simpler to operate.

When offering an employee a car allowance, you are not actually providing them with a physical car.

Instead, an employer makes an additional payment to the employee much like a salary.

The employee can then use this additional payment “allowance” to either purchase a new vehicle or maintain a current vehicle.

This is the second major benefit of the car allowance scheme.  It offers a lot more flexibility to the employee.  This is because they can choose whichever vehicle they wish to run, as opposed to a vehicle chosen by the employer.

As the employee is not receiving a physical car, there is no need to prepare a P11D or payroll the benefit as mentioned above. 

However, the employee is still receiving an additional cash payment.  So this must be added to their payslip and taxed accordingly.  As if it was an additional salary payment.

We hope that you have found the above useful.  If you have any questions on a car benefit vs car allowance, please do get in touch!