Fleet News

Guest opinion: Calculating the true cost of cash opt-out

CORPORATES in the UK may be paying too much money in the form of cash to employees who elect to opt out of their company cars.

As a tax partner at Wilder Coe specialising in company cars, I have seen increasing numbers of fleets including a cash-for-car option to increase employee choice. There will always be an element of cash-electing employees within most fleets.

However, many may be paid on historical rates of cash that are no longer appropriate.

If you consider the wholelife costs of a number of popular fleet cars on the market today – putting to one side the rising cost of fuel as, in an opt-out situation, the employee is responsible for bearing the fuel costs – many have actually fallen in recent years.

But numerous corporates I visit and talk to are still paying cash allowances to employees entitled to opt out of company car provision on rates set some years ago when capital costs were higher.

That leads many companies to pay too much cash to their employees, although addressing this situation retrospectively may pose real HR and morale issues to try and reduce rates once established.

Companies should consider very carefully how they calculate the amount of cash they offer to employees in lieu of a company car, and identify and calculate accurately the total costs of providing cash compared to those of the car.

Factors to consider include capital allowances, the expensive car leasing disallowance, National Insurance contributions and, in many cases, on a straight cost-of-provision comparison, companies may decide the car provides them with the cheapest mobility solution.

To allow for this, companies should hold regular cash-for-car reviews and make it a point of the employment contract that cash rates will be reviewed regularly and may be revised up or down.

Companies should also consider that cash provision is not simply setting a benchmark such as a monthly leasing rate for the cash equivalent. Many also neglect to factor in the 40p per mile that employees can claim back for the first 10,000 miles they drive their own cars on company business and the 25p thereafter.

This can make a serious difference to the amount of cash being paid over to the employee, especially when compared to the actual costs of providing a company car.

They need to take proper advice at this point to ensure they are not paying too much in terms of mileage allowance and the use of external agencies at this point can make a world of difference.

For example, the Cash Allowance Scheme (CAS), pioneered by Cheshire-based The Miles Consultancy in the UK benefits market, allows some or all of the cash allowance to be paid without the burden of income tax, employee National Insurance and employer National Insurance contributions, bringing major savings for the corporate customer.

CAS works by increasing the efficiency of the Inland Revenue’s Approved Mileage Allowance Payments (AMAPs), allowing the reduction of the employers’ income tax and National Insurance bills and cutting drivers’ tax bills. This scheme, and others, are well worth considering.

With the increase in the number of employees using their own cars for work, companies need a number of checks and controls in their fleet policies to ensure employees are regularly servicing, maintaining and checking their vehicles.

To meet duty of care requirements, opt-out drivers’ licences should be checked to ensure they are still qualified to drive and do not have excessive points on their licences. Again, external agencies can play a role.

Cash-for-car is not an issue that is likely to go away – some 72% of UK companies are now believed to offer some form of cash alternative.

But corporates can make the system far more efficient for themselves and their drivers by remembering and carrying out some of the basics.

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