Over the past few years, company car allowances have emerged as an alternative choice to traditional car allowance that were known to provide many car lease benefits for employees. Motorists in the UK were attracted to the idea of a one-time cash sum that could be used to buy their own car or lease a vehicle privately. This meant that they could drive a brand new vehicle from a wider range of selection without having to worry about paying benefit-in-kind (BIK) car tax. However, current market conditions coupled with new innovative offerings in the form of all-inclusive car subscription programs, have seen company car allowances becoming less sought after.
What are the advantages and disadvantages of company car allowances?
The main advantage of having a car allowance means that employees are provided with freedom of deciding what to do with their vehicle - whether to get a new car, upgrade or keep using their old vehicle. Such freedom can also translate to an individual choosing to use the allowance to instead cover the cost of public transport, particularly with new work-from-home arrangements that require less commuting where they are in a position to save a lot of money given their low annual mileage.
While company car allowances may seem beneficial, the disadvantage is that drivers are responsible for all the running costs of the vehicle, including the MOT, repairs, insurance and road tax. This also includes company car mileage rates that would have otherwise been reimbursed for business These factors have been amplified by the effect of the pandemic, coupled with the ongoing economic uncertainty that have increased these running costs. When considering the new vehicle supply issues, increasing interest rates, and perhaps most importantly, a cessation of manufacturer and dealer discounts; employees are now questioning whether such freedom and flexibility of company car allowance schemes are being met with affordability.
What are some alternatives to company car allowances?
For employers, company car allowances have resulted in less spent on vehicle procurement, maintenance and servicing since employees are now responsible for managing their own vehicle. However, this administrative benefit is becoming slowly outweighed by having to continuously increase their ‘cash for car allowances’ in the light of recent economic uncertainties.
Once attractive, personal contract purchase (PCP) deals and personal leasing are now necessitating a sizeable deposit upon getting initial approval for a vehicle. They are also known to be contracted on a basis of around three to five years which can be restrictive with how agile businesses need to be to ensure they have stable cash flow in the changing economic circumstances. This compounded with the rising inflation, fuel prices, and even price increases in car insurance, more people are looking at other more attractive options.
How is car subscription better than the benefits of car allowance?
Much of the flexibility and freedom that are favoured in company car allowances are exceeded by the offerings of car subscription programs. When employees choose to subscribe to a car, they can expect to enjoy the following benefits:
- A wide range of choice in vehicle selection
- Inclusive coverage of servicing, maintenance, insurance and MOT as part of the subscription price
- The ability to swap their vehicles according to their changing job and personal requirements without incurring any additional fees
- Flexible mileage allowances that can be changed pending on differing needs - especially in the event of work from home arrangements
As car subscription providers continue to innovate their product offerings through flexible arrangements that build upon the perks of novated leasing, employers will begin to gravitate towards car subscription. Such perks may include the following:
- payments to managed and paid by payroll using a combination of employee’s pre and post-tax salary
- reduced overheads due to inclusiveness of insurance and vehicle maintenance from car subscription providers
- no lock in contract or early cancellation fees meaning employers can modify their fleet size accordingly to their changing business needs
By leveraging a flexible mobility solution for their employees, employers are able to safeguard and adapt their operations in times of economic uncertainty and fluctuating business activity.
The impact of subscription on the capital allowance on electric vehicles
The UK government has implemented tax regimes for vehicles to encourage more businesses to adopt electric vehicles as part of their fleet as a way to advance national sustainability initiatives. However, businesses new to these tax implications and capital allowances on electric vehicles may be unsure whether their best option is to purchase or lease the vehicle. The decision will ultimately be dependent on its use and fit for purpose respective to business needs.
Car subscription has become a viable solution for businesses in helping understand the usage patterns of electric vehicles. Offering a lower barrier to entry with no long-term commitment, employees may be enticed to take advantage of new electric vehicle subscription programs that may help them experience an electric vehicle and answer some of the following questions:
- Will an EV fit into their lifestyle?
- What happens if technology quickly changes?
- What will second hand values be like in an unproven marketplace?
- Will they be able to live with the public charging network?
- What are the real-world fuel savings?
By having their employees be at the forefront of the electric vehicle experience, companies can methodically determine which capital allowance and tax relief option, whether through purchasing or leasing, will be the best option for their cash flow impacts. The long term implications of trialling electric vehicles through car subscription programs can also mean that employees will also gain a better understanding of the following:
- charging requirements based on mileage needs from their employees
- how to effectively plan out the appropriate installation of charge points at their company sites
- forecasting amount of reimbursement for employees who charge their vehicle domestically
The final verdict: Is car subscription the future of employee vehicle usage?
The bottom line is that car subscription, with its flexible and affordable offerings, has become a highly viable alternative to new or even used car ownership. However, this solution is not definitive and its practicality is ultimately dependent on the employee’s priorities. As for company car allowances and other alternatives such as PCP deals, these solutions are still relevant but are losing value for both employees and employers who are pivoting to more flexible solutions given the current market conditions and evolving work arrangements that are demanding more agile ways to use their vehicle.