Company cars remain major benefit to employees

Company car benefits remain one of the most popular company perks for employees with strong motivational and aspirational qualities, according to the latest surveys.

Studies show that more than six out of ten company car drivers think the offer of a similar choice and value of vehicle is an important consideration in any future decisions they make regarding job moves.

The same sense of value applies to employers, too. Research shows that more than two-thirds of businesses believe the company car benefit is an important employee reward and one in five companies plan to upgrade their car policies in the next two years to help secure, retain and motivate the best employees.

When asked to rank the most important factors in choosing a company car, drivers put reliability at the top, followed by fuel efficiency and safety. In contrast, the brand of car was ranked as the least important consideration.

The studies clearly show the attractiveness of a company car to potential employees and suggest that businesses need to review their benefits package to ensure their company car offering is sufficient to secure sought-after talent in a competitive employment market.

Why are company cars still popular?

Anyone who runs their own car will know of the expense involved. The motoring bill includes regular expense items like road fund licence, maintenance, service and repair, breakdown cover, insurance and new tyres – and that’s without factoring in the cost of unforeseen mechanical problems and other unexpected expenditure.

Then there’s depreciation – the annual decline in the value of your car, caused by its increasing age, its degree of obsolescence and the arrival of new models on the market.

The AA calculates in its 2014/15 motoring costs that a new diesel car, with a list price of £16,000 to £22,000 – which covers many of the current models available today -would have an annual standing charge of £3,411 when depreciation, road tax, insurance, cost of capital and breakdown cover.

That same car also has running costs of 18.25p per mile, according to the AA’s calculations, once fuel, tyres, service and parts, plus parking and toll charges, are taken into account.

So, if you drive a typical 15,000 miles a year on average, using the AA’s figures that’s another £2,737 in running costs to take into consideration, giving a grand total in motoring expenses of £6,148 a year – all for the privilege of running your own car.

What are the benefits of a company car?

It’s of little surprise then, given the costs involved, that company cars remain such a popular benefit with drivers.

To start with, there is no residual value risk associated with the depreciation of the car as this is borne by the supplier, typically a leasing company or asset finance provider. If the car is purchased rather than leased, then the employer bears the residual value risk on disposal.

Running costs are also covered by the employer, including servicing, maintenance, parts, tyres and breakdown cover, along with the appropriate level of business insurance.

Business mileages are typically reimbursed at the appropriate rates, often, but not exclusively, using the Government’s Advisory Fuel Rates, which are currently 11-21p per mile for all business miles carried out in a petrol car and 9-13p in a diesel car, depending on engine size.

When it comes to private mileage in a company car, the benefit of having all private fuel paid for by the company has become less attractive over the years due to the high tax charge this attracts. Most experts now suggest that employees should cover the cost of private mileage themselves.

What’s the downside?

While there are huge benefits to the employee of running a company car, the major downside is the amount of Benefit-in-Kind tax that has to be paid on the value of the car benefit.

Since 2002, the Government has switched the way it taxes this particular ‘benefit-in-kind’ (BIK) from a mileage-based system to a calculation that takes into account the car’s CO2 emissions and the list price.

The amount of CO2 your car emits – expressed in grams per kilometre (g/km) – determines, how much tax you must pay for running it.

The car’s official CO2 figure determines the tax banding, which is expressed as a percentage of the car’s list price.

So, for example, a car emitting 120g/km attracts a BIK charge of 19% if it’s a petrol car and 22% if it’s a diesel in the current tax year. If the car costs £20,000, the charge is either £3,800 or £4,400, on which you pay tax at your own marginal income tax rate, whether that’s 20%, 40% or 50%.

Company car tax on the increase

As announced in recent Budgets, company car tax has gone up by 2% in the current tax year, 2015/16, and it rises by the same amount for each of the next three years for all cars emitting more than 75g/km of carbon dioxide, up to a maximum of 37%.

However, the rate will increase by a further 3% in 2019-20, giving a total rise of 11% in four years.

By switching to cars with very low carbon emissions, drivers can try to keep their bills as low as possible, and it’s a simple equation: the lower the car’s carbon emissions, the lower the corresponding tax bills.

However, so-called Ultra-Low Emission Vehicles (ULEVs), which have emissions below 75g/km such as hybrid-electric or pure electric vehicles, have since April lost their tax free status for the first time.

Two new tax bands, at 1-50g/km and 51-75g/km of CO2, attract BIK rates of 5% for petrol models and 8% for diesel models for vehicles emitting 1-50g/km of CO2, and 8% for petrol and 12% for diesel for vehicles emitting 51-75g/km.

From next year, 2016/17, when the current 3% diesel surcharge is abolished, the tax rates become a standard 7% for all models emitting 1-50g/km and 11% for all models emitting 51-75%, a move which many pundits have called a disincentive for buyers of electric and other ultra-low emission vehicles.

If you need more information about company car benefits, please get in touch.