Watson Buckle Blog
The 'cash or car' dilemma
Changes to the tax laws over recent years have lessened the appeal of company cars, which were previously a standard perk for most executives and middle managers, and as the next tax year approaches, many companies and individuals may again be looking at whether continuing with such schemes are the best way forward.
Before April 2002, drivers paid tax based on the number of miles they drove, but since then the tax bill has been determined by the car's CO2 emissions. This meant that drivers of less-polluting cars may have been better off, but the larger cars traditionally favoured by fleet buyers became a more expensive option.
Many employers were understandably reluctant to ask senior staff members to 'trade down' to a smaller (and greener) model, and a number of firms took this opportunity to review the benefits they offered, for example by offering employees a cash alternative which allowed them to make their own choices. This also had the advantage in some cases of reducing tax and administration costs and allowing for a wider range of employee benefit packages.
However, fleet cars clearly still have a role, with over a million such vehicles still on UK roads – even if this figure has fallen dramatically in the last ten years or so. Furthermore, vehicle technology is improving all the time – even 'prestige' brands such as BMW and Audi now offer models emitting less than 120g/km of CO2 – which attracts the lowest rate of tax. Unfortunately, it was announced in the pre-budget report that the bands would be changed from April 2012, so the minimum tax rate will only apply to cars emitting less than 99g/km – although it is reasonable to assume technology will again catch up.
Anyone who declines a company car and accepts an additional salary payment instead would save on Benefit in Kind (BiK) taxation, as well as taking home a larger salary cheque, but would of course have to balance that against paying for and running a car. An employer may offer a 'pence per mile' payment (PPM) for business mileage, which can vary from just covering the cost of fuel, to a more generous payment which contributes towards running costs. The additional salary is of course taxable, but PPM payments are not, up to certain limits.
The key question for an individual is whether the extra salary, tax savings and any PPM payments would cover the costs associated with a car including tax, insurance (which must cover the driver for business use) and maintenance. For employers, allowing (or requiring) staff to 'opt out' of company schemes may bring about savings in tax, administration costs and purchasing fleet vehicles, but this needs to be weighed against the costs of higher salaries and PPM costs.
For many people, the 'cash or car' question will be a simple cost-benefit analysis, but for employers there are other considerations. Removing an established perk may be unpopular in some cases, but on the other hand the loss of such visible status symbols may fit in with 'flatter' corporate structures in some cases. Modern technology means video conferencing and the like is a viable alternative to personal visits, and the resultant drop in pollution and congestion from fewer cars on the road can benefit all businesses. Finally, whichever party wins the next general election, taxes on motoring have been rising for years and there is little reason to suspect this will change, with a large public-sector deficit to rein in. As a result, it is likely that people will continue to closely analyse the pros and cons of company car schemes over the coming years.
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