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Cash allowances: Are you wasting money on cash for cars?

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Cash for car is an umbrella term that covers a raft of funding alternatives to the traditional company car.

But in its simplest and most straightforward form, in lieu of a company car employees receive an adjustment to their salary to spend – their employer hopes – on a vehicle.

How does an employer decide the ‘right’ cash allowance sum and what happens if the scheme proves too costly or a change is needed?

Many organisations, say experts, do not take a mathematical approach, preferring to benchmark the cash sum paid to an employee against a cash allowance figure paid by industry sector rivals – £5,000 gross is perhaps the most widely quoted figure – or based on the monthly lease rate of a vehicle, the list price of a vehicle or even a percentage of salary, with 15% the most widely quoted.

While such an approach is simple, experts say the cash allowance will almost invariably be ‘wrong’ and frequently too high, as the sum paid to employees should be based on the net wholelife cost of running a company car to the employer.

That assumes employers, as is usual, want to provide a cash or car benefit alternative to staff as opposed to totally withdrawing the car benefit.

Harvey Perkins, tax partner at business advisers KPMG, says: “Whether the employee chooses to opt for a company car or a cash allowance, the cost to the employer should be the same.”

Stewart Whyte, managing director of the Fleet Audits consultancy, is blunt in his assessment of most employers’ approach, saying: “There is no structure and there are no rules in the main because employers have lost sight of what they are trying to achieve by offering a cash allowance.

“Employers should not look at cash allowances in isolation.

"They should calculate how much in total it will cost to employ an individual and within that should be the value of a company car/cash allowance.

"Many people, particularly in London, do not want a car or cash in lieu so, in some cases, it becomes additional salary.”

Company cars are invariably an employer’s second largest expense after salaries and Alastair Kendrick, tax director at accountants and business advisers MacIntyre Hudson, says: “Financial directors want to reduce costs and HR consultants preach the benefits of cash allowances but many companies are not saving money because they are paying more to employees in allowances than it cost to provide a company car.

"They perceive a saving, but it is not a real saving.”

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