What is a car allowance?

Written by yasiradnan94
29 July 2020

You’ve probably heard of the company car and some its associated tax issues. However, you may not have of a car allowance.

A car allowance is a sum of money you add to an employee’s annual salary for the purpose of allowing them to buy or lease a vehicle.

The employee is then responsible for sourcing and buying/leasing the car. They’re also responsible for maintaining and insuring the car, as well as monitoring expenses. This is not the case with a company car.

How does it work?

Firstly, you need to decide how much you’re willing to provide to the employee in order for them to purchase a vehicle.

A recent survey found that the average car allowance in the UK is as follows:

  • £10,300 for company heads (directors & c-suite individuals).
  • £8,200 for senior managers.
  • £6,500 for middle managers.
  • £5,200 for sales representatives.
  • £4,600 for professionals.

It is then imperative to include a car allowance clause in the employee’s contract and proper professional help should be sought.

Once the staff member buys (or leases) a vehicle, they’ll be able to claim mileage allowance. This should cover the cost of fuel as well as wear and tear.

Is car allowance taxable?

One of the main differences of giving your employees an allowance, instead of a company car, is that you take car allowance tax out of the employee’s main earnings at the normal income tax rate. This is because you pay the allowance as part of your employee’s salary and tax is calculated as normal within payroll.

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