Opting out and choosing cash

  • We guide you through 'cash for car' schemes
  • Get the best possible value for money
  • What you should expect and the pit-falls uncovered

Under a 'cash for car' scheme, employees can choose to finance their own car to avoid company car tax, with employers refunding business mileage at an agreed rate.

But calculating a cash payment in lieu of a company car can be complicated as employees choosing cash will be taxed on the allowance at their highest marginal rate. The employer will also need to specify whether the cash allowance is pensionable or non-pensionable.


What is 'cash for car'?

Put simply, it's cash to the employee instead of a company car. The company benefits by removing the cost of running a company car and the driver benefits because they will receive a pay rise based on cash they would have otherwise spent on Benefit in Kind (BIK) tax on the company car.

Drivers can use the money to acquire their own car, either by using conventional funding methods - outright purchase or hire purchase - or by choosing a personal contract purchase (PCP) or personal contract hire (PCH) agreement through a leasing company. These involve paying monthly 'rentals' and a final balloon payment to either buy a vehicle outright (PCP) after a set term or hand it back after a set term (PCH).

Monthly payments can also include maintenance costs and even tyre replacement as negotiated with the leasing company. So a car run on PCP is potentially little different from a company car from the point of view of convenience.

The PCP monthly payments are calculated from the difference between the cost of the car new and what its guaranteed worth will be at the end of the PCP agreement. This means the monthly outlay is usually less than with straightforward hire purchase.

Is cash for car popular?

Cash alternatives to a car are now widespread, with some industry observers saying more drivers are ready to hand back the keys to their corporate wheels and enter the world of private motoring. On the other hand, other sources say employees are reluctant to take cash for car offers.

Will your company offer a set amount of cash?

No. Each individual case is unique because drivers will have different financial circumstances and several aspects to consider, so expert advice is key.

Cash-for-car drivers have to take financial responsibility for their own cars and so effectively have debt against their names, which in turn could affect their credit ratings when applying for other financial arrangements, eg a mortgage.

Some drivers may already have a poor credit record which could cause problems, particularly in structured personal leasing schemes where ownership must pass to the driver, that were not apparent with a company car.

Furthermore, although servicing and maintenance packages can be included in a PCP deal, the driver needs to know he or she is responsible for the car if he is dismissed, made redundant, or moves to another post.

Claiming for using your own car on business

Drivers using their own car on business-related journeys can claim a rate per mile that is tax and National Insurance Contribution (NIC) exempt under the Inland Revenue Authorised Mileage Allowance Payments (AMAPs). These rates reimburse a driver at a standard rate regardless of engine size or fuel. This rate is currently 40p/ mile up to 10,000 miles, and 25p/mile thereafter. The amounts claimed may be used to offset the cost of running their own car.

If an employer reimburses a driver at a lower rate than the AMAPs, the driver is entitled to claim tax relief on the difference. Conversely, reimbursements made at a higher level than the AMAPs will incur tax liability.

What's a fair deal in a 'cash for car' agreement

Unfortunately, it's not as simple as it might seem. Some suggest a guide figure of 15% of salary.

What are the benefits?

The main benefit is being able to choose the car of your choice. You can either opt for a less expensive car and take the cash allowance as extra salary, or use the full amount of the allowance for a different type of car (eg 4x4, sports car etc) which may not be allowed under your employer's normal company car policy.

The best PCPs can mirror the fixed cost comforts of a company car for drivers by offering risk-free packages including roadside breakdown and rescue and cover against early termination.

However, if you intend using your personal car for business use, it is important it's comprehensively insured for business use and is 'suitable for purpose'. These and other issues may be risk-assessed by your employer and included in your Contract of Employment or Company Car Policy document.