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Flexible benefits are a growing force in modern companies, where there may be demand for a cash option instead of a company car as part of the benefits package. Under a ‘cash for car’ scheme, employees can choose to finance their own car to avoid company car tax, with employers refunding business mileage at an agreed rate.
But calculating a cash payment in lieu of a company car can be complicated as employees choosing cash instead of a company car will be taxed on the allowance at their highest marginal rate. The employer will also need to specify whether the cash allowance is pensionable or non-pensionable
What is ‘cash for car’?
Put simply, ‘cash for car’ is just that – cash to the employee in lieu of a company car. The company benefits by removing the cost of running company cars and the driver benefits because they will receive a pay rise based on cash they would have otherwise spent on Benefit in Kind (BIK) tax on the company car.
Drivers can use the money to acquire their own car, either by using conventional funding methods – outright purchase or hire purchase – or by adopting a personal contract purchase (PCP) or personal contract hire (PCH) agreement through a leasing company. These involve paying monthly ‘rentals’ and a final balloon payment to either buy a vehicle outright (PCP) after a set term or hand it back after a set term (PCH).
Monthly payments can also include maintenance costs and even tyre replacement as negotiated with the leasing company. So a car run on PCP is potentially little different from a company car from the point of view of convenience.
The agreement is calculated assuming a guaranteed residual value on the vehicle, so the repayments are made on the difference between the guaranteed residual value and the front end price. This means the monthly outlay is usually less than with straightforward hire purchase.
Is cash for car popular?
Cash alternatives to a car are now widespread, with some industry observers saying more drivers are ready to hand back the keys to their corporate wheels and enter the world of private motoring. On the other hand, other sources say employees are reluctant to take cash for car offers.
Demand for PCP schemes, which hints at the popularity of cash for car schemes, is running at between 1% and 3% of those eligible for a company car.
This suggests that either drivers are showing stubborn loyalty to their company cars in the face of losing them, or they are taking cash and heading for the private or used market. They could also be put off by the apparent complexity of the schemes – though this is largely unfounded.
Will your company offer a set amount of cash?
No. Each individual case is different, as drivers will have different financial circumstances. Expert advice is vital before offering these schemes, especially as, presumably, the company will want drivers to continue covering business mileage. The difference is that they will be responsible for their own car.
Because the driver has to take financial responsibility for his car and effectively have debt against his name, it could affect his credit rating when applying for other financial arrangements, eg a mortgage.
Some drivers may already have a poor credit record which could cause problems, particularly in structured personal leasing schemes where ownership must pass to the driver, that were not apparent with a company car.
Furthermore, although servicing and maintenance packages can be included in a PCP deal, the driver needs to know he is responsible for the car if he is dismissed or made redundant, or moves to another post.
Firms also have to decide how to reimburse their drivers for business mileage travelled in their private cars. They may decide on their own pence per mile arrangements or rely on the Inland Revenue Authorised Mileage Allowance Payments (AMAPs). The reimbursement arrangements form a key part of the cash for car equation (see below).
Claiming for using your own car on business – AMAPs
Drivers using their own car on business-related journeys can claim a rate per mile that is tax and NIC exempt under the Inland Revenue Authorised Mileage Allowance Payments (AMAPs). These rates reimburse a driver at a standard rate regardless of engine size or fuel. For 2005/6, this rate is 40p/ mile up to 10,000 miles, and 25p/mile thereafter. The amounts claimed may be used to offset the cost of running their own car.
If an employer reimburses a driver at a lower rate than the AMAPs, the driver is entitled to claim tax relief on the difference. Conversely, reimbursements made at a higher level than the AMAPs will incur tax liability.
Calculating a fair deal in a ‘cash for car’ agreement
Unfortunately, deciding how much to put forward as a fair deal in a cash for car agreement is not as simple as it might seem. Some suggestions put forward a figure of 15% of salary as a guide. The following example takes this as a start point:
Example: Volkswagen Golf SE 1.6 FSI company car
P11D price: £14,942
CO2 rating (2005/6): 168g/km/20%
Contract term: Three years/60,000 miles
Employee’s business mileage: 10,000 miles per year
Employee’s salary: £36,400 per annum (40% tax payer)
1: Cash allowance from employer in lieu of company car:
15% of salary = £273 per month (1), net of tax at 40%
2: Company car Benefit in Kind tax saving:
20% of P11D price = £2,988. Annual tax payable is £2,988 x 40% = £1,195, giving £99 per month.
3: Company car business mileage reimbursement:
Reimbursed at £75 a month, based on 10,000 business miles a year at typical 2005/6 rate of 9p/mile.
Monthly cash amount available in lieu of a company car:
1+2+3 = £447 per month.
Drivers pay income tax and Class 1 National Insurance on their cash allowance instead of income tax on their company car Benefit in Kind calculation. You may be better off ‘opting out’ of your company car providing the cost of running your own car is no more than 1+2+3 = £447 per month (2).
(1) Excluding 1% NI contribution. (2) Excluding tax relief on AMAPs.
Assuming drivers will be able to claim a private car useage allowance of 40p/mile (up to 10,000 miles per annum) and 25p/mile (over 10,000 miles), this should be taken into account when calculating running costs of the private car.
It seems like a lot of work. Where are the benefits?
The main benefit is being able to choose the car of your choice. You can either opt for a less expensive car and take the cash allowance as extra salary, or use the full amount of the allowance for a different type of car (eg 4x4, sports car etc) which may not be allowed under your employer’s normal company car policy.
The best PCPs can mirror the fixed cost comforts of a company car for drivers by offering risk-free packages including roadside breakdown and rescue and cover against early termination.
However, it is important that, if you intend using your personal car for business use, it is comprehensively insured for business mileage and is ‘suitable for purpose’. These and other issues may be risk-assessed by your employer and included in your Contract of Employment or Company Car Policy document.