Cash allowances
Frequently, companies base monthly cash allowances for employees in lieu of a company car on the monthly lease rental of the vehicle the member of staff is entitled to drive. However, while such payments are easy to calculate and administer with employees additionally claiming business mileage, they are unlikely to be cost-effective from an employers’ viewpoint who will be paying more than they need.
According to David Rawlings, director of Business Car Finance Wessex and a former automotive tax adviser at Deloitte, cash allowances payments should be based on the after tax wholelife cost of a car, but from there the value of the actual payment depends how ‘scientific’ the employer wants to be.
Rawlings explains: “If a business is going to include business mileage reimbursement utilising the tax-free Approved Mileage Allowance Payment system in its cash allowance calculations, then it must have in place a robust mileage capture system.”
He continues: “Employers must decide what they are trying to achieve. Will all employees fulfilling identical roles receive the same cash allowance or will mileage payments be taken into account? Employees who travel the most business miles could find themselves with a significantly better deal if mileage is paid in addition to the cash allowance.
“It is therefore important for employers to decide how the cash allowance will be structured, the tax efficiency of the package and how much administration it wants to encounter.
“Businesses that are prepared to undertake the administration will base cash allowances on wholelife costs and a robust mileage capture system within employees’ total reward packages, while smaller fleets will typically arrive at a straightforward cash sum because any other system is felt to be too complicated.”
Jon Mackney, head of consultancy at Arval, says that when calculating the amount of cash, most companies should start from a position that the allowance for each grade of employee shouldn’t cost the employer any more to provide than the benchmark company car that the employee would otherwise be entitled to.
“To assess this, the employer will need to know the wholelife cost of the relevant vehicles, which would typically include a combination of the lease rate, road fund licence, blocked VAT, maintenance cost, cost of business related fuel, Class 1A National Insurance contributions and insurance.
“Other factors that should be taken into account are the amount that the employer will reimburse the cash-taker for business mileage in what will be a private car and the typical amount of expected business mileage to provide the total expected reimbursement cost. With this information, the cash allowance can be calculated as the monthly wholelife cost of providing the company car less the expected business mileage reimbursement cost.”
Many employers, says Rawlings, also want to benchmark payments against peers in their industry sector – notably in the construction and pharmaceutical industries – to ensure allowances are on a par and avoid employees leaving in pursuit of a higher monthly figure.
Additionally, best practice advice indicates that the cash allowance should not be linked to pensions. Ideally, the employer will show the payment of the cash allowance as a separate field on the payroll. In that way employees will see that they are receiving cash in lieu of a company car.
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