Car Allowance: What It Is And The Average Allowance For 2024
There are several ways to save on car costs, from company car allowances to salary sacrifice schemes. We understand that navigating these options and determining which one offers the best value for you can be challenging.
In this blog, we’ll explore car allowances - what they are and the average allowance in the UK for 2024.
What Is Car Allowance And How Does It Work?
A car allowance is a company benefit where employers provide employees with a monetary amount instead of a company-owned vehicle.
This allowance, which can be paid monthly, quarterly, or annually, helps employees lease or purchase a car over time, in addition to their regular salary. Employees are then taxed on the company car allowance at their regular income tax rate. The employer can decide the amount they provide the employee with but it is usually based on the average cost of leasing the specific vehicle. The allowance should also help cover the ongoing costs of running and maintaining the vehicle, including insurance, fuel and any necessary repairs.
One key advantage of a company car allowance is the flexibility it offers in choosing a vehicle, as opposed to traditional company car schemes where the vehicle is selected for you. Employees can also sell the car when they choose and keep it if they leave the company. Additionally, it can be more cost-effective and removes the burden of managing and maintaining a fleet of company cars.
One key aspect of car allowances is that employees can use the benefit however they choose. Whether it’s buying or leasing a new car, maintaining their current vehicle, or covering other personal expenses, the flexibility is entirely up to them.
The Average Car Allowance For 2024
A reasonable car allowance in the UK varies between £3,600 and £10,300 per year, which roughly equates to £380-£860 per month. Typically, the amount an employee receives depends on their seniority - the more senior you are, the more likely you are to receive a higher car allowance.
Types Of Car Allowance
There are different types of car allowances available for companies to choose from, let’s have a look at the differences between them:
Fixed Car Allowance
A fixed car allowance is a regular, predetermined amount of money paid to employees, regardless of how many business miles they drive. While it’s a straightforward option, it may overcompensate employees who drive fewer miles.
Reimbursement-based Car Allowance
With a reimbursement car allowance, employees will need to keep track of their mileage. This will then be submitted for reimbursement at a per-mile rate for the business miles driven.
Variable Car Allowance
Variable car allowance is what it says on the tin - the amount paid varies depending on the number of business miles driven during a specific period. This should align the compensation with how many miles are actually driven.
What Factors Influence Allowance Amounts?
Several factors influence the amount of your car allowance, with the primary consideration being the employee’s job role and responsibilities. For instance, employees who travel frequently for work may receive a higher allowance than those with limited driving needs. Other factors, such as regional costs and location, can also impact the allowance. Here’s a list of elements that can affect company car allowance amounts:
How often an employee uses their car for work-related travel,
The employee’s job position,
The average cost of car maintenance,
How much time an employee spends driving?
How Is This Broken Down?
As mentioned earlier, car allowance amounts can vary significantly. Senior decision-makers typically determine the allowance, which is then included in the employee’s contract. The Government have set out the following benchmarks for car allowance, these figures can differ from one company to another:
| Income Band | Car Benefit (£) | |
|---|---|---|
| £0-£8,499 | 2,590 | |
| £8,500-£14,999 | 3,170 | |
| £15,000-£19,999 | 2,950 | |
| £20,000-£29,000 | 3,220 | |
| £30,000-£39,999 | 4,410 | |
| £40,000-£49,999 | 5,360 | |
| £50,000-£74,999 | 6,020 | |
| 75,000-£99,999 | 6,490 | |
| £100,000-£149,999 | 6,530 | |
| £150,000-£199,999 | 6,320 | |
| £200,000 and over | 8,190 |
Tax Implications Of Car Allowance
Car allowances are taxed as income, meaning that this benefit is subject to National Insurance (NI) and income tax at the same rate as the employee’s salary. Therefore, if the employee is in the higher tax bracket, they will pay more on their car allowance.
Should You Use a Salary Sacrifice Car Scheme or Opt For Car Allowance?
As a company, your decision to choose between a salary sacrifice scheme or a car allowance should reflect your values and align with employee preferences and demands. Let’s have a look at the difference between the two:
Salary Sacrifice Car Scheme
A salary sacrifice car scheme will allow employees to save on NI contributions and income tax by sacrificing some of their gross salary for a company car, which reduces the taxable income. Employees who use the scheme can also salary sacrifice maintenance, repairs, servicing, insurance and even a home charger. The downside to salary sacrifice is that the range of car choices can, in some cases, be more limiting than car allowance. You can only lease a car via salary sacrifice (in some instances, at the end of the lease you can choose to buy the car) which can limit you to the mileage allowance available per annum.
Car Allowance
A car allowance may be a better option if you want your employees to have the flexibility of choosing and owning their car. However, because tax is not deducted from this benefit, it means employees and employers still have to pay NI and income tax which ends up costing both parties more money.
Other Important Considerations Include
As always, with any big financial decision like a car scheme, whether it’s a car allowance or salary sacrifice, there are important considerations to be aware of.
Credit Checks
No individual credit checks are needed for a salary sacrifice scheme because the employer is technically leasing the vehicle.
Pensions
Salary sacrifice schemes can impact an employee’s pension contributions, depending on the type of pension plan they have. For those with a defined benefit pension (common in the UK), their pension may be affected, as car salary sacrifice is not considered an approved form of salary sacrifice.
However, if an employee has a defined contribution pension scheme, salary sacrifice is less likely to have an impact. This is because pension contributions are typically calculated before the salary sacrifice is applied.
A company car allowance will not affect an employee’s pension because the allowance doesn’t form part of their salary for bonuses and redundancy purposes.
Reporting To HMRC
Employers are required to inform HMRC if they provide cars for private use, including all company car benefits. At The Electric Car Scheme, we simplify this process by offering automated monthly HMRC reporting, removing the hassle of employers offering electric car salary sacrifice schemes.
If you want to learn more about EV salary sacrifice and how it could work for your company, read our blog.
