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Should You Opt Out of a Company Car Scheme?

By: Kevin Dowling BA (IMC) - Updated: 6 Sep 2012 | comments*Discuss
Company Car Tax Scheme Road Government

It seems that the company car is fast becoming something of an endangered species. The UK Government has sought in recent years to reduce the number of company cars on the road, and has tried to achieve this with a combination of higher taxation and other expenses associated with running a company car.

Yet many people in a variety of different careers rely on a company car to do business. So, has the time come for everyone to opt out of their company car scheme?

Most companies now offer ‘cash for car’ schemes, under which employees can avoid paying company car tax by choosing to finance their car themselves. In return, employers agree to refund the employee’s business mileage at a preferential rate.

Cash for Car Schemes on the Rise

Cash for car schemes aim to be a good deal for all concerned. The company benefits from employees taking up the scheme because it reduces their total costs to own and maintain a fleet of company cars.

The employees also benefit, because as part of the scheme they receive an increase in their take-home salary, a pay rise based on the cash they would otherwise have spent on tax for their company car.

Calculating a cash payment, however, can be complicated. Any employee accepting a payment in lieu instead of a company car will be taxed on the added salary at the highest marginal rate. The company will also be required to determine whether the cash allowance offered to employees will be considered part of their pension benefits.

Employee Options

Once a ‘cash for car’ offer has been agreed, the employee can use the additional money to assist with the purchase of their own car, either by buying a car outright or taking up a hire purchase scheme, such as a Personal Contract Purchase (PCP) or Personal Contract Hire (PCH).

These schemes involve paying a monthly ‘rental’ amount and a final lump sum payment to purchase the vehicle outright or, if you prefer, to hand the car back with no further payments required.

Many PCP or PCH agreements also include in the monthly charge maintenance costs and even tyre replacements. In this respect, in terms of convenience the schemes are little different to running a company car.

How Popular are Cash for Car Schemes?

Since the Government began to make company cars more expensive for employers, larger numbers of people have been looking to opt out of their company schemes and return to the world of private car ownership.

That said, each individual is unique and the decision to hand back the keys to your company car will largely depend on your personal financial circumstances. Owning and maintaining your own car is expensive, and although maintenance packages are available through PCP schemes, drivers should be aware that they remain responsible for the monthly car payments if they are made redundant, dismissed from their role or decide to change jobs.

Using Your Own Car for Company Business

Employees who already own a vehicle and intend to use it for company business journeys can claim a rate of allowance per mile, which can be used to offset the running costs of the car.

This rate is exempt from tax or national insurance deductions and effectively reimburses the driver at a standard rate, regardless of the size of their vehicle or the type of fuel it uses. The standard rate is usually 40pence per mile for the first 10,000 miles usage, and 25pense per mile thereafter.

Is it Best to Opt Out?

Determining whether it is best to opt out of your company car scheme really depends on how much business mileage you clock up, and the amount of personal mileage also. If a large proportion of your mileage is spent on the road working, then continuing with a company car may be the best thing for you.

If, however, your business mileage is relatively low, then you may be better off with a higher proportional salary instead of the company car.

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