Nearly 15 years ago, the concept of “car allowances” was launched by the government in a scheme designed to relieve companies of the capital investment and management costs involved in running large employee car fleets. It offered employees a viable alternative to taking the taxable “company car” benefit by allowing them (sometimes with some restrictions, and with business insurance cover obligatory) to choose to run their own car for business travel and reclaim the costs, with a mileage rate paid by their employer. In a fit of rather mistaken generosity, the original scheme was launched with higher allowances for cars with larger engines, and rather similar to what MPs paid themselves for driving down to Westminster to stay in their second homes! This was soon chopped back to the scale that still remains little changed today, even though the price of diesel fuel has risen by well over 50 per cent, alongside which taxation of the company car has also steadily increased.
As it stands today, your employer can pay you 45p per mile for the first annual 10,000 miles, and 25p for every mile above that figure, tax-free, with any excess payments over these official rates taxed at the prevailing taxation rate. Even with much higher fuel costs, it’s still quite possible to more than break even on your running costs this way, instead of taking a taxable company car. You also have the value of driving the car of your choice to add to your benefits, although the perceived value of that will of course be very individual. Given a sensible choice of a reasonably economical car, avoiding heavy depreciation by buying maybe a two- to three-year old one and running it for three or four years, and allowing enough time on business trips to drive with some economy in mind, you can still make a decent deal out of the car allowance scheme. Choose the wrong car, drive it hard and thoughtlessly on your work trips, and you’ll destroy the whole economics of the proposition.
Car allowances are generally not a good deal for higher business mileage drivers though, as average mileage rates decrease with annual mileages above 10,000, and higher mileage drivers are more likely to need a larger and more comfortable car. But many local or occasional business drivers doing up to around 10,000 business miles a year will be quite happy in something smaller and more economical, as well as cheaper and lower depreciating, and there are plenty of very fine cars that you can run on 35 to 40p a mile. As a typical example, you might choose a 60mpg 2011 Golf 1.6 TDI (costing £12,000) with depreciation at £1,200 to 1,500 a year, and business fuel would cost around 22p to 25p a mile, leaving you around £1,500 to £1,800 a year to cover servicing, insurance, tyres etc., Choose a more ambitious 2011 BMW X3, delivering 45mpg, even if driven carefully, but depreciating at around £3,000 a year, and after paying for fuel you would be left with nothing to put towards the other overheads – although that might well seem like a decent deal to 40 per cent taxpayers, if they avoid paying company car tax that might well be over £3,000 a year. Driven sensibly, there’s probably plenty of potential to break even on something like a 2011 Golf GTD, (cost £14,000) and averaging 45 to 50mpg. If you feel your job is very secure and your annual mileage predictable, you could probably take on a personal lease on something like a new Peugeot 2008 1.6 HDi or a Ford C-Max 1.6 TDCi with a minimal down payment for around £230 a month and still come out smiling over four years, although you’ll own nothing at the end of it.
Do get good advice on the taxation details, but running your own car rather than paying heavy tax on a company car brings out a responsible attitude that will save you money and encourage your efforts to go “the extra mile” with the satisfaction of putting money straight into your own pocket rather than the taxman.