Choosing between a company car and a car allowance

For many years a company car has been seen as part of an employment package. However, many employers still offer the option of a car or travel allowance which technically speaking could prove more financially beneficial to you and the company. There is a big proviso – the allowance has to be structured carefully and correctly.

In the Essential User part of the fleet a company car tends to be the norm. In the Executive Levels of the fleet a portion of the cost to company is offered as a car allowance- if a company car is not selected. The real question is – which is the best option.

The main issues revolve around matters such as - HR policies, the latest perks tax legislation and the new increases in individual taxes, fleet operating costs, personnel management, AARTO and accident management, driver needs, a pure perk or a essential need – to name but a few

Choosing the company car option?
The company car system is a well established part of employment policies in South Africa
The advantages of taking a company car:
• The level of car choice is usually related to a grade level. This varies from company to company and the type of industry. Industry competition ensures a competitive approach by companies to maintain the right level of vehicles on a selector list.
• The company usually covers all operating costs.
• Fuel costs are usually managed through a fleet card. Certain limits can be placed on the driver in terms of private use
• Services, maintenance and repairs are usually covered. However, abuse of the vehicle could mean the driver paying for certain costs.
• You are not involved in any purchasing or interest costs.
• Probably the most important benefit of a company car – you are not concerned about the depreciation costs. Other than fuel, this is the next highest cost. As you don’t own the car you don’t have to worry about this loss of depreciation at re-sale time.
• The main disadvantage to company cars is that the perks tax for a driver in the new tax year has been increased by some 30% compared to the last tax year.

What’s changed for the 2011/ 2012 tax year for a company car option?
From a 2.5% taxable value on the vehicle’s price – less VAT – it is now 3.5% on the full price of the vehicle. A logbook is essential because if the business use is 20% or less of the annual kilometres driven a full 80% of the taxable value has to be added to monthly remuneration. The tax levels for individuals have also changed slightly due to inflation ‘creep’.

If your kilometres driven for private usage is less than 20% i.e. your business kilometres is more than 80% of your total annual kilometres, only 20% of the taxable value (calculated on the 3.5%) will be added to your remuneration.

Now the car allowance option?
In South Africa the car allowance method is used by about 25% of the corporate vehicle fleet park. Many employees have opted for a car allowance over a long time – and – many have gone back to the company car option. It’s been the same with companies. It is a fact – a car allowance scheme usually costs a company some 22% more in operating costs than a company car fleet.

The main thinking about this option is that - “it is my car”. However the problem has always been that the three main criteria that relate to the tax level have not always been taken into account. The facts that have to be matched are – the actual allowance compared to the vehicle’s purchase price and operating cost, compared to the kilometres driven. If these are not in sync the PAYE due will usually be much higher than need be. This is a common situation because the actual costings are not done properly by the company.

The new tax tables have changed again with the pricing bands now increased to R60 000. For example – for vehicles priced from R360001 to R420 000 the same allowances are claimable. But there can be a big difference in operating costs between these two price levels. Basically you will also see a 10% +/- increase in your monthly PAYE.
The real problem will be the ever increasing serving and maintenance costs and the ever increasing price of fuel. Budgeting for an allowance set for the next four years can turn into a real problem for the driver.

So what is the right option for you as an individual or for your company?
There are many different company and personal circumstances – so take a look at the comparative chart. It should help you make a better decision. Make full use of the FleetCUBE calculators to help you make an informed decision.

For the driver – an allowance choice means that you are responsible for ALL costs. A company car means that you have NO responsibility for the vehicle’s costs. In these inflationary times it could be that the latter is the better option.

For the company – if you want to control costs at an acceptable level in terms of company overheads, the company car looks to be a better option.

Click here to go to the calculators and work out the best option for you or your company

Click here to view our comparative chart for Car Allowance VS Company Car