Is it worth running a company car?
Anyone running a company car will be painfully aware of their vehicle's emissions. It has been this way since 2002, when the government switched the way it taxes this particular ‘benefit in kind' (BIK) from a mileage-based system to a complicated calculation that takes into account the car's CO2 emissions (essentially their fuel economy) and the list price.
It's all part of the plan to get us running around in more eco-friendly cars.
The amount of CO2 your car emits – expressed in grams per kilometre (g/km) – determines, in part, how much tax you must pay for running it.
This is how the sum works. The car's official CO2 figure determines the tax banding, which is expressed as a percentage of the car's list price. So a Mini Cooper emitting 127g/km sits in percentage band 16 (bands currently run from 5 to 35%). That 16% of the Cooper's £14,900 list price is further modified by your own income- tax band, whether that's 20, 40 or 50%. You now have your annual company car bill.
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However, thanks to a tax escalator that adjusts the bandings yearly, that bill can go up every year. And a new escalator – whereby the tax due on higher-emitting cars will rise by 1 percentage point in 2013/14 and then again in 2014/15 – means many company car drivers will see a steady increase to their costs and lead more of them to ask, is it worth it?
Among them is Matt Lacey, 37, from St Albans, an executive at a soft drinks company and a higher-rate taxpayer. He is trying to weigh up his options as his company car is about to come up for renewal. "I feel I might save money by opting out, but should I?" he asks.
Increasingly, companies are offering cash alternatives, according to business car consultant David Rawlings. He says that companies realise car leases are still an important tool in recruiting and retaining the best employees but they also don't want the hassle of running a car fleet.
Using Matt, a typical wavering company car driver, we'll probe his monthly finances to ask a broader question applicable to all employees given the option: is it worth taking the cash to source my own car?
As a guide, the benchmark car his company has said he is entitled to is a BMW 318d saloon, which is worth around £27,000.
Many firms offer a fairly wide choice of manufacturers, but drivers are restricted to lower-powered diesel models because they're the best on CO2, despite a surcharge imposed by the government that penalises diesel cars over petrol-fuelled models.
Sticking with the company car
Car manufacturers have responded to the regulations by offering special business-specific models with very good CO2 figures, but the choice can be restrictive, as is the case with Matt.
"We've got two children, so I'd like a family estate or a decent SUV. However, the CO2 penalties, particularly on SUVs, make them totally unsuitable," he says.
Until April, Matt has paid £100 a month in tax for his Vauxhall Insignia diesel. It's very good on CO2 at 112g/km but, following the introduction of the new tougher tax bandings, his tax bill has since climbed to £125 a month.
One way to save money is to choose a car that really cuts CO2 and take advantage of the new, very low-emission tax bandings. These bandings are expressed as a percentage of list price. For example cars emitting under 50g/km of CO2 are taxed at just 5% of list price, compared with 17% for Matt's Vauxhall.
So if Matt went for a more eco-friendly Toyota Prius plug-in hybrid, he would pay just £55 a month, despite this high-tech car being tagged with a £33,190 list price.
Matt's company will boost the amount it'll offer so employees can afford more expensive eco-tech cars, something Rawlings says is happening more often as companies get tax breaks if they attract more low- emissions cars to their fleet.
However, Matt's firm doesn't include Toyota cars. Peugeot is on the list and does do a hybrid version of the 3008 SUV that would be the right size for his family.
But the high list price means, despite its impressively low 88g/km CO2, Matt would pay £117 a month, rising to £125 in April 2015. A normal diesel version of that car at 110g/km of CO2 is actually cheaper at £113 because of its lower list price, rising to £128 in 2015, -probably his best option for a company car.
Taking the cash allowance
So what about taking the cash allowance instead? The first thing to be aware of is this will be taxed, in Matt's case at 40%. So his £6,422 allowance becomes £3,854.
However, one big perk for company car drivers who take the allowance is the mileage rates. HM Revenue & If a company offers the full 45p and the employee drives significant business miles in a car that uses very little fuel, this can really help the sums add up on a private car. The only drawback is mileage limits on personal finance schemes that require you to hand the car back, such as leasing.
Doing the sums on the £3,854 extra a year means Matt would get £321 a month to play with. Adding another £40 a month claimed back from the comparatively low 200 business miles he does a month, that's £361. With that figure in mind, let's go car shopping.
Customs has set a figure of 45 pence per mile that the company can reimburse business mileage (which sadly doesn't include commuting). Matt's company offers him 20p a mile, but he can offset the 25p difference against his tax.
|FIVE REASONS TO PICK A COMPANY CAR||FIVE REASONS TO TAKE THE CASH|
|Little administration – insurance, tax, etc||Your business and personal miles are low|
|A good choice of tax-friendly, low-CO2 models||You don’t care about having a brand-new car|
|Too many restrictions on the type/make of car you’re allowed to use the cash for||The company car choice list is restrictive|
|Your high mileage (10,000+) makes private schemes too expensive||Fuel economy is low down on your list of priorities for a car|
|Mileage rates for business driving are too low (below 20p a mile)||You want to own your car|
One of the biggest headaches switching from company cars to running your own is having to sort out all the servicing, insurance, tax – and all those boring chores that private owners have got used to.
One way to minimise that is to lease the car on a maintenance plan, the same way companies rent their cars but tailored for private buyers. Matthew mentioned he was interested in a Nissan Qashqai+2 seven-seat SUV, a car that would have been costly on the company car scheme with BIK at £146 a month, rising to £170 in 2015.
On a personal lease via one of the biggest providers, Nationwide Vehicle Contracts, we found a frugal 1.6-litre diesel Qashqai+2 Acenta model for £350 a month including VAT, servicing, road tax and tyres. The first payment is double that, then it's the flat rate for three years, after which he hands the car back.
With insurance coming in at £41 a month, Matt would be £30 out of pocket every month on the £361 he has available.
That compares favourably with the company car scheme in which he was £113 out of pocket for the Peugeot, but he'd have to watch he didn't exceed the 10,000-mile annual limit.
The other option is to buy a secondhand car. To make the comparisons easier, we've again gone with Matt's preferred choice of family car, the Nissan Qashqai+2.
Matt's employer has set rules on the cars that are allowable for business use. So it has to have fewer than 90,000 miles on the clock, not be a soft-top convertible and to be regularly serviced according to the manufacturer's recommendations.
We found a 2009 example of the Nissan with 47,000 miles for £10,849 on AutoTrader. A loan is needed, and the top-value personal loan found by Moneywise is one from Barclays (available to existing customers only) at 5.1% APR. So £10,900 over three years works out at £327 a month.
So far, so much cheaper, but there's the £41 insurance to add, plus road tax at £18 a month and servicing at around £33 a month. And because this is an old two-litre diesel rated at 42mpg instead of the newer, fuel-sipping 1.6 at 60mpg, the difference on Matthew's 9,600-a year private mileage is another £36 a month.
Then there's the worry that something might break, particularly now the car is outside its warranty.
Add all that up and Matthew is actually £96 out of pocket every month for the three-year-old car, not far off his cost of a brand new company car.
But here's the kicker – unlike the leased car or the company car, Matthew would own this Nissan at the end of three years. The seven-seater hasn't been around that long, but based on the very impressive residual values of older five-seat Qashqais, we reckon that after three years the car would still be worth around £7,000. So that's the equivalent of £194 a month, meaning if Matt went with the secondhand car, he'd be £98 a month better off.
Going secondhand is not for everyone but for those who travel few miles and can resist the gleam of new metal, the allowance can top up a salary nicely while still fulfilling their car needs.
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