An employer’s guide to car allowance
A company car can be a real luxury for both the business and employees. They’re a great perk to help recruit staff — and to help retain them too!In some cases, even if a company car isn’t provided, a car allowance is an absolute necessity. Today, staff members need to travel further than ever for work purposes, as face-to-face interactions are so critical in business — and Zoom calls simply don’t cut it.Whatever your reason may be for considering company vehicles, it’s also worth knowing what car allowance is and how it works. From understanding the calculations for an employee's individual car allowance to the potential tax benefits, it can help minimize any complications that come with company cars and managing a car allowance policy.In this guide, we’ll give you everything you need to know to take advantage of car allowances in relation to company cars for business use.What is a car allowance and how does it work?
A car allowance is a sum of money that the business adds to the employee’s annual salary — allowing them to either buy or lease a vehicle, and maintain it, for company purposes.Whether your employees buy a car or lease it is something that can be discussed between the company and the employee in question. It’s typically the employee who sources the vehicle themselves.However, there are pros and cons to both buying and leasing employee cars. When buying a company car, you’re benefiting from insurance costs decreasing over time but you’re also fronting a lot of money to buy the car upfront.With leasing, there’s a small to non-existent down payment but insurance rates may end up being higher to cover gap insurance.Car allowances also help employees with car operation costs, such as insuring it and maintaining it.It’s very important to note that a car allowance is separate from mileage allowance. This is something you may want to consider alongside your car allowance program.As a car allowance is given to the employee to buy their own personal vehicle, they can claim a mileage allowance on top when using this car for work purposes. A car allowance can help to cover fuel costs in general but claiming a mileage allowance in addition is also allowed.What does car allowance cover?
Before giving an employee a car allowance for their own car, it’s useful to know what it’s meant to cover so that you’re giving your employee a realistic allowance. A car allowance is meant to generally cover the costs of owning a car for business purposes, including:Insurances, taxes, and depreciation costs
In the scenario that an employee needs the car for work purposes, then insurances need to be reimbursed as well as depreciation costs. All cars face depreciation to some extent and taxes are inevitable for most things we pay for in life.This can also cover things such as registration and inspection costs, or other annual or semi-annual regulatory inspections and fees.What is a reasonable car allowance amount?
The average car allowance amount can vary depending on a number of factors — such as the employee, their position within the company, type of car, and so on. It can also be influenced by how much the vehicle is used for business vs. personal use, and where the car will be located.In the US, the monthly average is between $400 - $600.Regardless of how much allowance a business provides, it’s important that there’s a car allowance clause in the employee’s contract. Just like any other benefit or agreement made between the employer and employee, it’s necessary to put this in writing. How to calculate car allowance for employees
The above averages may be helpful for estimating car allowance amounts, but how do you calculate your own employee’s car allowance?As mentioned above, the cost of fuel, maintenance, taxes, and reimbursements all influence how much the car allowance will be. Here’s a step-by-step process to make calculating your car allowance easier and faster.1. Use a tool like FuelEconomy to calculate fuel costs.
There are many tools available online to calculate your fuel costs. One worth using is FuelEconomy. It’s great for estimating fuel costs over a certain amount of time, whether it be daily, monthly or yearly.Estimate the type of vehicles, average mileage per month, and average local fuel costs to get an estimate, then add that fuel cost to your car allowance.2. AAA for car repair estimates.
AAA is an established repair and maintenance company, providing emergency repair assistance to those across the USA. You can use their site to roughly estimate the car repair costs that might be needed — whether that’s the MOT or general servicing.It depends on the car in particular. Add a general estimate for regular maintenance to your car allowance.3. Use a comparison site for car insurance.
Car insurance can vary greatly from one company to another and depends on what you want covered. It’s important, as a business, to protect yourself as much as possible. Using a site like CarInsurance.com can be helpful for finding what prices are available and what each one covers individually.This might differ depending on the driver’s experience on the road, where they’re located, and other car expenses like the amount of business miles or fuel types. Include these costs divided into monthly portions into your car allowance as well.4. Calculate depreciation and other fees.
And finally, make sure to consider depreciation in a vehicle too. This differs depending on the type of car the employee picks and whether it’s a new vehicle or used, what damage occurs over time, and the amount of mileage it accrues.There are plenty of free depreciation calculators online to help you calculate this.Now, add all of these annual costs together and divide by 12 to come up with a monthly car allowance for your employees.Understanding mileage rates for car allowance
Mileage rates are separate from a car allowance, although they’re often confused. Mileage rates are calculated based on the distance the car covers over time for business purposes. This requires employees to do regular mileage tracking, and the employer then reimburses a set rate per mile.Another option is the employee can track actual expenses and then the employer can cover actual costs of fuel and regular maintenance via a vehicle reimbursement program.Either way, a car allowance pays a certain amount for the car and its maintenance, whereas mileage is usually a reimbursement that covers the cost of fuel, and basic wear and tear that may occur during those trips. The amount of CO2 emissions produced can also influence the charges on the vehicle.Standard mileage rates in the US
In the US, the IRS mileage rate allows claims of 67 cents per mile for business vehicles in 2024. Keep in mind that these mileage rates are updated annually in January.There are also differences for vehicles used for charity and medical moving purposes. These mileage rates are important for businesses when trying to get a clearer overview of vehicle costs.Keep in mind that if you use this standard mileage rate, employees do not need to manage expense reports for related expenses. It’s a set amount based on the employee’s mileage log for business travel. While tracking mileage can be time-consuming, there are many mileage tracking apps that make it easier for employees and it’s one of the easiest ways to help calculate reimbursement rates or vehicle allowances.The differences for a company car vs. car allowance
There are differences between providing a company car to your employee as opposed to giving them a car allowance. Which one is more beneficial or cost-effective? There’s a number of factors to consider here:Pros and cons of car allowance
Just like all business expenditures, it’s worth weighing up the pros and cons to dishing out car allowance.The pros of a car allowance
The major benefits of a car allowance are typically:- A car allowance is relatively easy to set up and calculate, as mentioned above. Using a flat rate or stipend for your vehicle programs helps alleviate variable costs throughout the year while still covering vehicle expenses for employees.
- It’s easier for employees and can help save time. The setup of a car allowance system is straightforward and once in place, you can simply add and remove car allowances as and when needed.
- Staff can use their vehicle for travel to and from work as well.
- For car allowances, you also don’t need to track mileage and deal with business expenses, unless you offer mileage on top. This reduces the amount of reporting and expense reimbursing you’ll have to do, saving both your company and your employees time and hassle.
The cons of a car allowance
On the other hand, some downsides of having a car allowance are:- Setting a car allowance amount might be more challenging when it comes to your individual employees. Some may be deserving of more allowance but at the same time, you want to ensure fairness for everyone within the organization.
- Not all employees will need a car, and those that do may vary greatly in the mileage needed for work. It’s finding that happy medium that can often be the difficulty. Keeping your workforce happy and, more importantly, valued is critical. Without it, you may find your staff are more inclined to leave—which isn’t great for business.
- With a car allowance, employees own the car and can use it for personal purposes as well, which means that you’re technically paying for non-business use as well as business use, at least in terms of maintenance and upkeep.
It really depends on what your business requires and can afford to provide, and the situation of employees at your company. In some cases, it’s much easier to ensure fairness with one option over the other.Having a set company travel policy — whether it’s for a car allowance, air travel, or other corporate travel — can make sure all of your employees receive equal benefit, no matter what their role requires of them.FAQs about car allowances
Still have questions? These quick answers should help.Making business travel simpler
There’s a lot to consider when it comes to car allowance as a cash alternative for business, so make sure to do your calculations correctly. By doing so, you can maximize the effectiveness of this benefit and enable your employees — and your business — to go places.For even more ways to save on and simplify your business travel program, check out TravelPerk. The all-in-one travel management software makes it easier to keep track of, book, manage, and reimburse employee travel by plane, rail, car, or more.?)
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