August 19, 2020

Cash or Car? Which to Choose?

Company Car Versus Cash – Making the Right Decision

For drivers eligible for a company car or cash alternative, it’s one of those strangely divisive issues

Attitudes tend to be rather entrenched and inflexible – you’re either in the ‘company cars rule’ club or believe that cash in your pocket always outweighs any other type of benefit.

Of course, every individual’s circumstances are different, so there is no definitive answer to who’s right and wrong but, there are some factors that should be considered to ensure that you make the right call.

As the vast majority of drivers who take cash end up acquiring a vehicle with some type of finance package, we’ll focus on comparing the pros and cons of this versus taking the company car option.

Tax Liability

Let’s get the big one out of the way first: a major consideration for all company car drivers is, ‘how big will my tax bill be?’ There were major changes to benefit-in-kind taxation (BiK) in April 2017 which mean that if you do have the option of an employee provided car or a cash allowance, you’ll now be taxed either on the BiK value of the car, or on the value of the cash alternative, whichever is higher.

Let’s take a look at an example to illustrate this:

For a petrol car emitting 120 g/km CO2 with a P11D value of £25,000, the taxable BiK value for 2020/21 would be calculated as follows:

£25,000 (P11D value) x 27% (CO2 based BiK rate) = £6,750 (BiK Value)

If you have the option of taking a cash alternative larger than this, say £8,000, you’ll be taxed on this amount rather than the BiK value of £6,750, whether you take the car or the cash. If your employer’s cash allowance is less generous, say £6,000, and you take the car, you’ll be taxed on the £6,750 BiK amount.

A 40% taxpayer would pay £3,200 annually on an £8,000 cash alternative and £2,700 annually on the £6,750 BiK amount. For a 20% taxpayer, the difference is even less, at £1,600 for the cash alternative and £1,350 for the car BiK amount.

But, by selecting the right type of car, drivers can get around this rule and benefit from very low BiK tax rates, to find out how read on.

Ultra Low Emission Vehicle (ULEV) Taxation

By selecting an Ultra Low Emission Vehicle (one emitting 75g/km CO2 or less), the rule about paying tax on the higher of the company car BiK value or the cash alternative doesn’t apply.

This means that you can benefit from very low BiK tax rates simply by choosing a highly efficient car. In fact, for vehicles with no CO2 emissions at all (electric cars) the BiK tax rate for the 2020/21 tax year is 0%. To see the full company car BiK tax tables through to 2023 click here.

With the choice of pure electric and hybrid cars increasing all the time, it’s highly likely that there’s something on the market that will fulfil both your business and private needs. To find out more about alternative fuel vehicles visit our alternative fuels resources page.

Degree of choice

The degree of choice you have in selecting a car might be one of the key reasons to consider taking the cash option. In the past, many company schemes were relatively restrictive in terms of manufacturer, type of vehicle and fuel type. As the labour market has changed, and benefit managers have recognised the key role that employer provided cars can have in attracting and retaining the best talent, these rules have tended to become more relaxed.

With the overwhelming popularity of SUVs, the traditional ‘saloon or hatchback’ choice has usually been extended to allow drivers to select a vehicle that matches both their business and private transport needs. Likewise, with fuel choices; the dominance of diesel-powered cars has tended to give way to greater flexibility, including the option for hybrid and fully electric vehicles.

Even schemes with limited manufacturer options are now more likely to offer a wide range of vehicle choice, as car makers produce an ever more diverse range of cars to meet the needs of new market niches.

However, to gain the maximum degree of choice, taking the cash alternative will certainly open up more options, including the possibility of selecting a second-hand vehicle.

Personal car finance impacts

Choose a company car and it’s simple, you’ll forgo your cash allowance in return for the use of a brand-new car every three or four years. Take the allowance and look for your own vehicle finance, and there are a few more factors to consider.

1. Is a deposit required?

Most personal car finance deals require you to put down a lump-sum deposit of some size at the beginning agreement. Personal contract hire deals (by far the most popular form of personal car finance) have what is known as a ‘rental profile’ that illustrates how big the initial deposit will be, followed by the regular monthly payments.

These profiles vary but typical profiles for a three-year PCH deal might be 3+35, 6+35 or 9+35. These figures denote initial payments of three, six or nine months’ rental, followed by 35 additional monthly payments. By choosing a higher initial payment, you’ll reduce the amount that you have to pay each month and vice-versa.

As an example, for a car with a monthly rental value of £400 on a 6+35 profile, you’ll pay a deposit of £2,400 followed by 35 payments of £400.

2. Impact on access to other finance

The amount that you owe over the course of a PCH lease agreement will be visible on your credit report to other lenders and so could have an impact on your ability to raise other personal finance. So, if you think you’ll need to get a loan, or any other form of credit during the agreement period, it’s worth considering that taking a company car has no impact on your credit report.

On the flip side, keeping up regular payments over the three or four years of a PCH lease could, ultimately, improve your credit score as repayment discipline also plays a key part in the rating process.

3. What happens if you find yourself in financial difficulty?

Under PCH deals you never own the vehicle, you simply have use of it for a defined period. This means that if you are unable to make payments on it, due to unforeseen circumstances, then the car can be taken back by the finance company.

It is highly likely however that the contract hire provider would charge an early termination charge for a vehicle returned before the end of its contract. These charges can amount to the value of the leasing payments still outstanding on the contract, and the cost would be levied in one go. If you are in financial difficulty already, this would compound your problems.

If you have any concerns about your health, or your future employment status, that would affect your ability to pay for a privately leased vehicle, you need to think carefully about whether a lease is right for you.

As company cars are either owned or leased by your employer, your own financial situation has no bearing on your continued use of the vehicle.

Will I get a better deal privately?

There is no shortage of personal leasing deals available on the market, from both dealers and independent finance providers. This competition means that, by shopping around, you’re likely to find a competitive quote no matter what vehicle you’re looking for.

Business leases do tend to be cheaper than personal leases for a couple of reasons. One, is that some of the VAT charged on payments is recoverable, depending on exactly what type of finance agreement is in place and how the vehicle is used. VAT is always payable in full on personal leases.

In addition to this, companies are usually able to secure volume discounts from manufacturers and leasing companies, due to the size of their fleets. These are usually significantly bigger than discounts made available to retail customers.

What’s included in the price?

Company cars come with the maximum degree of comfort and certainty in terms of the package of benefits. Employers expect to have to pay for the maintenance and servicing of the car, as well as providing comprehensive insurance. They are also likely to provide full breakdown and recovery cover and, potentially, accident management services, which assist in getting you back on the road as quickly as possible and provide a temporary vehicle following an accident.

If you choose the cash option and take a PCH deal, it’s important to read the small print to see exactly what’s included. Most deals are quoted without maintenance, but you can usually add this on at an extra monthly cost. Manufacturers also tend to provide a couple of years of breakdown assistance on new vehicles, so this is also likely to be included at no extra charge.

Insurance, however, will be down to you to source and pay for separately. There are conflicting statistics on how much the average comprehensive car insurance policy in the UK costs, but it’s somewhere between £500 and £900 per annum. Obviously, private insurance premiums vary widely depending on your claims history and how clean your licence is.

End of contract charges

At the end of any lease agreement (be it a company car business lease or a personal contract) certain conditions need to be met in order to avoid charges. These include a charge for damage to the vehicle that is deemed beyond that which would be expected through normal wear and tear, and a charge for any mileage in excess of that outlined in the agreement.

Industry average damage recharges broke the £300 barrier for leased cars during 2017 according to the BVRLA and are unlikely to have reduced since then. Employers take differing views on the liability for these costs, some anticipating it and building it in to their overall fleet budgets, while others will seek to recoup the charges from individual employees. Obviously, any damage to a vehicle on a personal lease will need to be paid in full by the individual.

Excess mileage charges vary a great deal, from around 10p per mile to around 30p, with some leasing companies having a tiered approach such as 10p for the first 5,000 excess miles, then 20p for the remainder. The extent of these charges mean that it is much cheaper to choose a contract that genuinely reflects your likely mileage, than to pay for a lower limit and incur the excess costs at the end of the agreement

For fleets, there are often ‘pooled mileage’ arrangements in place where excess mileage in some vehicles can be balanced against lower-than-expected mileage in others. For the private lessor, these excess costs are likely to be rigorously enforced.

The choice is yours

Ultimately, if you’re in the fortunate position of having the choice between an employer funded vehicle and a decent chunk of additional cash in the form of an allowance, then it’s difficult to go too far wrong.

Taking the cash alternative is likely to open up a degree of choice that won’t be available through a company car scheme and the issue of tax liability is now something less of a decision-point due to the changes in legislation.

Choosing a company car provides the luxury of never having to concern yourself with car related expenses, or deal with the consequences if there’s a mechanical fault or you’re involved in an accident.

It’s a tough choice, so make sure you do your homework before making a final call.