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Company car vs car allowance: The pros and cons

Date: 31 August 2017   |   Author: Rachel Boagey

Company cars have long played a key role in employee benefits packages, but with taxes on company cars rising, many fleet drivers are choosing to take a cash alternative and reaching for increasingly attractive and competitive personal contract purchase (PCP) deals instead.

While there are advantages and disadvantages to either method, using a cash allowance to buy a new car on a PCP deal can allow more freedom of car choice, an option that is increasingly appealing.

"Those opting for a PCP will find some very competitive deals on the market," explains Adrian Dally, head of motor finance at the Finance & Leasing Association (FLA).

Dally says that the amount of credit taken out for the PCP covers only the depreciation of the vehicle over the duration of the agreement, rather than its full value. "This keeps the monthly cost down," he says. "When the customer reaches the end of the agreement, they have the choice to either hand the keys back, buy the vehicle or begin a new PCP agreement. People like that flexibility."

Ashley Sowerby, managing director at Chevin, explains that in most instances, company cars still work out cheaper for employees with the tax and salary sacrifice versus money repayments, and the initial upfront costs. "However, if the costs of PCP come in line with the taxable amount, it's a very real scenario to see this happening; unless company policy restricts the use of grey fleet for business purposes."

However, according to recent figures released by HMRC, the number of employees paying company car tax has reached a five-year high. Compared with a PCP deal, the company car offers greater security as the driver doesn't need to worry about maintenance, insurance or servicing costs. "Company cars are also currently less of a tie-in for employees when compared with taking PCP deals,"
explains Sowerby.

But some drivers have no choice, explains Lauren Pamma, head of fleet consultancy at Lex Autolease. "There are essential users who need the company car to go out and do their jobs to visit customers, and the company has to provide them with a vehicle as they can't do their job without it," she says. "That will always exist and personal lease deals really can't compete against that."

The power of choice

But what about those drivers who do have another option? One of the main attractions of PCP deals is that they aren't restricted by company selection policy, notes Chevin's Sowerby. "Companies have brand, image and operating cost concerns, and this is why company car selection often restricts certain makes, models and body types, such as convertibles or, for fuel saving, certain emission brackets and fuel types," says Sowerby. "Therefore, if the company car is a pure benefit and not for business purposes, then the benefits for the employee mean they are instead completely free from these restrictions."

Pamma explains that the main thing that will affect whether drivers go for a company car or a personal lease deal is their company car scheme. "If this isn't structured properly, then that's when people may start looking at PCPs with their cash allowance; it may allow them more manufacturer choice and therefore greater flexibility," he says.

Taking the cash option gives you a wider variety of choice - if not complete freedom - when choosing to buy a car via a PCP over the company car option, but it's unlikely that going this route will save the driver much money. "It's also important to note that if the driver opts for the allowance, it will be added to their salary and will be subject to tax," says Pamma.

Attractive deals

Toby Poston, director of external communications at the British Vehicle Rental and Leasing Association (BVRLA) points to figures that show a significant growth in demand for personal car finance, and while growth in traditional company car leasing is around 3.6% year on year, it is not keeping pace with the personal motor finance market.

"There is no clear evidence yet that traditional company car drivers are being pulled away by competitive personal leasing deals, but this is a potential concern, particularly as BIK company car tax rates continue to rise disproportionately," Poston says. "If employees who drive for work are using personal lease vehicles, then there is likely to be a lot less fleet
management involved."

Poston agrees that the main attraction for an employee to opt out of their company car scheme will be the avoidance of BIK company car tax and the greater freedom of choice when it comes to what car to drive. "But if drivers opt out of the company car and take the cash instead, they will have to pay tax on the amount of money, which needs to be considered," he explains.

Grey fleet problems 

So what could people turning to cash allowances mean for fleets and how are companies supposed to monitor CO2 if their drivers are driving what are basically grey fleet vehicles?

Poston says that personal lease vehicles are likely to have higher CO2 emissions. "Our latest BVRLA member fleet snapshot shows that the company car fleet had an average CO2 of 112g/km, while the personal lease fleet was up at 118g/km."

Alternatively, company cars offer a chance to monitor these things, explains Pamma. "From an employer perspective, the company car is a big advantage. Typically, we find company cars have far less CO2 than a grey-fleet equivalent because people choose them to keep their taxes down."

Pamma explains how Lex Autolease started looking at grey-fleet audits and monitoring cars that people own on cash allowances. "What we found was lots of 40-year-old Rolls-Royces and motorhomes. They're not great from a safety and environmental perspective but also from a reputation perspective. You don't want a customer turning up in a supercar when the company is all about the environmental culture. Get the cars to match the ethos of the business."

A viable future?

So does the company car still make sense for fleet drivers? Currently, Poston maintains that there are a number of wider trends that show a continued demand for company cars. However, in the future and longer term, he notes that we will see a certain portion of this company car fleet moving towards a mobility allowance "where some essential-use drivers may be encouraged to use a range of transport modes, including car rental and car sharing."

Jayson Whittington from vehicle data supplier Glass believes that the majority of people who are eligible for a company car will continue to choose one. "The number of employees paying company car tax has reached a five-year high, which proves that operating a company car continues to make sense for many people and barring significant changes to BIK taxation, is likely to continuing doing so."

Pamma believes that tax benefits coming in for alternatively fuelled vehicles from 2020 will see people come back into company cars. "There may be lots of personal lease deals but I think long term the company car will continue to thrive," she says.

Chevin's Sowerby says, "Fleets need to ensure the vehicle selection list reflects a fair and appropriate choice for the employees' roles and responsibilities. It will obviously make sense to have a different selection list for boards executives versus a supervisor."

Overall, company cars are a powerful employee benefit and recruitment incentive.They save money on ownership without upfront costs for the employee, such as insurance, tax, maintenance or breakdown. They also allow the business to ensure cost savings through control of fuel type and emissions, and protect its brand image. The FLA's Dally concludes, "Ultimately, deciding between a personal contract purchase and a company car will depend on the individual's circumstances, but those opting for a PCP will continue to find some very competitive deals on the market."