Thinking about it can be enough to bring on a headache, but, in a nutshell, a sizeable chunk of employers and other organisations still offer their people three options when it comes to cars.

  • Firstly, there’s picking a company car from a predefined list, or choosing any make or model within certain parameters as a ‘user-chooser’.

  • Then there’s giving up some of their gross (before tax) income in exchange for a car as part of a ‘salary sacrifice’ scheme.

  • Thirdly, many firms offer their people the chance to ‘opt out’ and receive a cash allowance in addition to their salary. Cash allowance-taking staff can choose whether to put the money towards buying a used car or a brand new one, leasing a new or used car on personal contract hire (PCH), paying for public transport, taxis, bikes and other mobility solutions if they’re in a position to seriously embrace green living, or blowing it all on chocolate each month if the urge is too great.

Actual ‘company cars’ have fallen in popularity

Wind the clock back to 2014 when George and Amal Clooney tied the knot, Narendra Modi was elected Prime Minister of India and manager David Moyes was given the boot by Manchester United, and one survey by Employee Benefits and Towers Watson found that 18% of employers offered salary sacrifice schemes, while 50%+ of new vehicle registrations were company cars according to the SMMT. In summer 2017, Barclays then cited a whopping 71.3% of organisations as providing company cars, albeit only to 8.2% of their people.

Personal car leasing opt out cash allowance

Back in the here and now in late 2019, though, and headlines over in the fleet management and HR worlds in recent months have consistently reported trends such as ‘BIK uncertainty and PCP/PCH schemes fuel cash allowance popularity’ and ‘Business fleet leasing continues to decline as PCH rises’, which certainly tally with CarLeasingPeople’s experiences and those of our parent company.

Cash allowance-taking and personal leasing are both on the up

Drilling down a little, the third quarter of 2018 saw company car fleet and van leasing fall by a combined 5.1%, while personal car leasing rose 19%, and one fleet manager who attended a Fleet News event had seen a 10% year-on-year increase to 50% in those of his staff opting out of their company car scheme and taking the cash allowance offered as an alternative. Figures from the BVRLA, who regulate the vehicle rental and car leasing industry, put personal leasing at 57% in 2018, with company car leases shrinking from 47% to 38%.

It can’t be a coincidence, can it?

Brushing aside for a moment the growing number of motorists turning their backs on buying cars from bricks and mortar dealers and through typical retail finance packages and PCP and instead dipping their toes into leasing, most official explanations over the move away from company cars point to a combination of:

  • benefit in kind (BIK) tax having risen consistently with an additional 4% fee slapped onto diesel cars more recently

  • the introduction of more realistic WLTP emissions and fuel economy tests that have pushed many models up a CO2 (and therefore tax) band or few

  • plus general uncertainty posed by a previously long period of government silence over company car tax rates beyond 2020/21, and the small matter of something called Brexit.

Opting out of a company car or salary sacrifice scheme and spending a cash allowance on buying or leasing a car immediately opens up a much tastier world of choice in many cases, staff not restricted to choosing between half a dozen set cars but able to drool over any make and model they like, depending on what they can afford. Fancy a convertible? Go fill your boots, as long as your job doesn’t frequently require carrying enormous boxes or ladders around. Some organisations do still choose to specify quite strict rules on non-company cars, though, such as requiring that they are 4/5-door saloons no more than around 5 years' old and perhaps even in certain conservative colours.

The pros and cons of company cars and cash allowances

For people whose daily commute to the office takes them less than half an hour and covers just a handful of miles, a company car often doesn’t stack up as the most sensible financial option, particularly if it’s through salary sacrifice, as the cost to the employee isn’t worth simply driving down the road or around the corner from A to B and leaving the car parked outside work all day.

Company cars are, though, usually brand new and therefore among the safest, most gadget-packed and economical on the market, and employers and other organisations are responsible for maintaining, servicing and repairing them, taking the responsibility off of employees’ plates.

Use company car opt out cash allowance for personal lease - SUV

On the flipside, being insured under a company car insurance policy doesn’t enable a person to build up their own no-claims bonus, and losing the job means losing the car and the means to get around, which poses an even bigger challenge for those with kids.

Employees who opt out and take a cash allowance won’t be liable for car-related benefit in kind (BIK) tax any more, which would otherwise have been added to their salaries and potentially made some of them 40% tax-payers, but the money their employer gives them to put towards a car is still subject to PAYE income tax and national insurance (NI) by HMRC, although it’s fair to say that the final amount often ends up being far from peanuts and definitely worth opting-out for.

Staff who regularly or occasionally drive their own bought, financed or leased cars for work purposes can usually claim tax back against the business mileage they cover, the first 10,000 miles reimbursed at 45p and subsequent miles at 25p. Being issued with a fuel card typically results in personal reimbursement rates falling, though, after HMRC rates have been accounted for.

Fifty Shades of Grey Fleet

From the perspective of employers, other organisations and their abacuses, there’s something reassuringly predictable about giving people fixed cash allowances, but the downside is that the money can be put towards older and likely less efficient or safe cars, increasing the duty of care required over such ‘grey fleet’ vehicles, a term that refers to all non-company cars used for work purposes regularly or even occasionally.

Staff opting out of company car and salary sacrifice schemes and using their cash allowances to buy or lease new or used cars often results in a much more diverse range of models in the car park, from people who subscribe to motoring journalist James Ruppert’s ‘bangernomics’ philosophy, to those who splash the cash on something fruity like a coupe with a V8 engine. It can be a headache for organisations to ensure that all non-company ‘grey fleet’ vehicles are roadworthy and insured, which is one of the disadvantages of opting out from a corporate perspective. 

Many entities are trying to turn as green as they can, so the flexibility and choice of cash allowances may tug at the collar of the uptake of electric and hybrid vehicles that would otherwise have appeared on company car shortlists, whereas many staff won’t have home wall-box charge points available in or near their properties.

Does personal leasing make sense for company car scheme opt out cash allowance takers

Fleets have typically tended to include maintenance packages with their leased vehicles, cover their servicing and other consumables like tyres, but according to epyx, only a fifth of personal car leasing contracts are specified with maintenance bolted on. This is a trend we see here at CarLeasingPeople and is understandable thanks to brand new lease cars usually being problem-free and covered by manufacturers’ warranties in any case, customers taking the risk over tyre punctures and viewing it as cheaper to just pay the one-off £200-400ish when each year’s service comes around.

Paying for a used car loan with the cash allowance

The short-sighted advantage of using a car/cash allowance to buy a used car through finance on a cheap loan with a low interest rate is that the monthly repayments could be significantly less than the money the employer sprinkles on top of the salary, kind of making it feel like a profitable situation.

If someone’s allowance is £400 per month after 20% basic rate tax deductions and the older used car they got a loan for costs £200 per month to pay off, after which they continue to own it, the perception might be that they’re £200 in profit each month. Depending on the car’s age and reliability reputation, it can make sense to take out a used car warranty, though, which will typically cost £50 per month upwards. Then there’s servicing at around £35 per month on average, insurance plus road tax (included in personal leasing prices) making the ‘quids in’ feeling quickly deflate.

Financing a new car after opting-out

Opting out of a company car scheme and spending the cash allowance on finance for a new car is a safer bet in terms of financial peace of mind, as new cars are covered by their manufacturers’ warranties, coming to the rescue in rare cases when issues do develop. A loan on a new car will commonly be more expensive than one for a used car, though, so more or perhaps all of the notional £400 post-tax car allowance would be used up, with insurance, road tax and servicing still to pay in addition. The new car will generally be more reliable, safe and economical, though, and will feature more creature comforts, so as ever it’s a case of swings and roundabouts.

Personal car leasing opt out company car allowance - new car latest technology

Using the cash allowance to lease a car

Personal car leasing prices are stated inclusive of VAT, making it handier to weight up different prices and options, but for anyone who hasn’t had a taste of contract hire before, there is usually an upfront, non-refundable amount to pay, typically called the ‘initial rental’, which is basically the subsequent monthly payment multiplied by 1, 3, 6, 9 or 12 months. For people opting out of their employers’ company car schemes and using their car cash allowances for personal leasing, they need to work out if they can afford to pay the initial lump fee, as it’s harder to find zero deposit car lease deals.

Some examples and number-crunching

Taking a couple of examples from our current special lease offers and deals as of mid-November 2019, a gorgeous Volvo S90 saloon in T4 petrol guise and Momentum Plus trim set to a 36-month lease contract with 8,000 miles allowed each year and an initial term of 3 months is currently priced at £268.79 including VAT. Meanwhile, SUVs are hugely popular among personal leasing customers and we currently offer the Kia Sportage in highly desirable Platinum Edition spec’ with the 1.6-litre GDI petrol engine for £215.99 per month including VAT.

As a very approximate rule of thumb, adding maintenance (servicing, tyres, windscreen, wipers, etc) typically increases the price by £35-50 per month and we often find that insurance averages around £50 for a driver in their mid-30s and older, with a full no-claims bonus. Personal car lease prices include road tax, though, which is a refreshing advantage.

Adding maintenance and insurance to these example cars’ basic lease prices translates to monthly payments of £370 for the executive Volvo saloon and £310 for the fashionable Kia SUV respectively, both therefore well within the notional £400 net cash allowance and putting a brand new, high-specification car on the driveway, which will also typically cost less to run and prove safer and more technologically-impressive than older used cars.

SUVs popular on personal car leasing for company car opt out cash allowance takers

It’s fair to note that the customer never owns the car they are leasing, though, and would have to start the process again or look at buying when the current lease contract comes to its end, unless the finance company offers them an ‘extension’ or even lets them buy the car, which is an uncommon scenario.

Choosing instead to spend the opt-out cash allowance on a finance loan for a used or new car would eventually result in the customer owning the vehicle, but depending on the length of the repayments and the annual mileage they cover, it may end up attracting unexpected repair bills later on, which needs weighing up as part of the equation. Cars depreciate the minute they’re driven, so any new or used car financed by a cash allowance will be worth much less than it cost at the start, unless it’s a rare classic Aston Martin or similar, which is highly unlikely.

Wrapping up

Our discussion on comparing the options open to people receiving a car cash allowance, that is – not in a scarf, hat and gloves now winter’s here.

If an employer offers a cash allowance to give staff the choice to opt out of the company car scheme, those who already drive a perfectly decent, reliable and suitable car that they and the company are happy with won’t really be faced with a dilemma at all, and can typically view the cash allowance as a nice bonus sum each month to spend on whatever they wish.

People who currently drive a company car and have perhaps done so for many years will have become used to sitting behind the wheel of a vehicle that, in the history of the model involved, will be the most responsive, refined, tidy-handling, safe and technologically-endowed yet, a vehicle they can be proud of parking on the driveway or outside the house with less “keeping up with the Jones’” envy than if they drove an older car.

Over the years, they’ll also have relied on their organisation’s fleet manager or HR team whenever a fault has developed, a tyre has needed changing or the annual service has come round, lulling them into a state of reduced responsibility.

Transitioning from a company car that is new or no more than a few years’ old to an older and perhaps thirstier, slower, less safe and crummier model would feel like a step backwards to many opt-out drivers if they aren’t fortunate enough to have a chunky ‘deposit’ to put towards a newish car using their monthly cash allowance and they’re hung up about owning the car rather than just enjoying using it.

Although personal car leasing does have a few disadvantages or at least points to consider, such as finding the upfront initial rental, the absence of ownership at any stage, the potential of incurring charges for significant dents and other damage picked up during the lease, and the way mileage is limited each year, it makes a heck of a lot of sense for company car scheme out-out staff who love the idea of their cash allowances enabling them to park shiny new cars outside their properties each night – ones that likely have funky ‘daytime LED’ light signatures and that may even be uber-cool SUVs that UK drivers can’t get enough of.

Except for hybrids and electric cars now and in the short-term future, BIK is only set to continue increasing, resulting in scores of drivers doing the sums and working out that it makes financial sense for them to opt out. As with anything in life, there are pros and cons to all options, but we hope our discussion article proves helpful, and our friendly personal car leasing team will be chuffed to answer any questions from people new to the concept.