Should I take an offer of a company car, or opt for the cash alternative instead? This is a question many prospective company car users ask, so our simple guide sets out the pros and cons to both.
A company car might seem like a great, hassle-free deal, but there are benefits to opting out of a scheme – even if you have to drive for your job and would need to buy a new car privately.
Why could opting out be a good idea?
Buy a car outright and you'll be investing in an asset that you'll be able to sell in the future. You'll also be able to choose from a wider range of cars than your employer might offer.
Some schemes will offer cars from only one brand, or will veto stylish models such as coupes and convertibles. You may also find that you are limited by engine size.
Even if you're a senior executive, the list of new cars available may depend on restrictions on CO2 emissions or safety ratings, both of which can affect the leasing costs for your employer.
Choosing a car privately also gives you the freedom to choose between diesel or petrol models, whereas your employer might push you towards diesel.
How much money could I get if I opt out?
The cash you'll be offered instead of a company car will be roughly what your employer would have paid to lease the car, possibly with a few caveats depending on their calculation method and on each individual employee.
If you want to know how much money is on the table, ask your fleet manager, HR department or payroll staff.
Once you know the cash value, the first thing to bear in mind is that the money will be added to your annual salary, so will be subject to your rate of personal income tax. That means you'll have less to spend on a private car than the value of the company car lease you would have enjoyed.
For example, a 40% taxpayer with a car allowance of £5500 added to their salary could end up with just £3300 after tax. From that you’ll not only have to fund the private car, but pay for your own insurance, maintenance and road tax.
I won’t have enough to buy outright. How can I finance a car?
There’s a big choice of finance packages out there. If you want to own the car, the simplest options are a bank loan or hire purchase (HP) agreement. Once you’ve paid back the HP monthly instalments, the car is yours to keep.
If you’re not bothered about owning the car, you could consider personal contract hire (you may hear it called personal leasing), as well as personal contract purchase (PCP). Both offer lower repayments than a bank loan.
With personal contract hire or leasing, you pay a deposit plus fixed monthly amounts, and hand the car back at the end of the term.
A PCP is similar, but at the end of the contract you’ll have the option to buy the car for a lump sum based on the car’s residual value (agreed in advance). This value will be influenced by your predicted mileage, which will also affect your monthly payments – so estimate as accurately as you can.
Finding the right PCP or personal lease can involve a lot of research, because there are so many variables involved. You’ll see variation in the size of the deposit, the length of the contract, and whether insurance is included or not.
On top of this, working out which cars are going to be more or less expensive to lease isn't easy. A lot can depend on the popularity of the model, and therefore its predicted resale value. Leasing is also incredibly competitive, so even once you’ve chosen a car, you need to shop around for the best rates.
Are there any other costs to consider?
One of the perks of a PCP or leasing is that you can choose to pay a premium to have all servicing, maintenance and roadside assistance taken care of. That means your personal motoring can, in theory, be as worry-free as running a company car.
You may be able to include a service package with an HP deal, but if you're buying with a bank loan you'll need to work out what to budget for this and have the extra funds available. If you go for a private car owned outright, then you’ll also need to sort out your own insurance, road tax, roadside assistance, and budget for potential repairs.
That sounds like a lot of hassle. Is a company car an easier option?
In principle, choosing a company car involves less research and planning. Many employees stick with a company car because the employer's lease company takes care of all the housekeeping, too. For some people, this lack of effort can justify the cost of company car tax on its own.
Ultimately, if you do your homework, you can end up with a great car using either the company car scheme or taking a cash alternative. You’ll find the information below useful to get the best deal.
OK, I’ll take a company car. What should I choose?
If you’re after a plush saloon, read our round-up of the best and worst executive company cars.
I think I’ll take the cash. I want to know more about private lease deals.
Here’s our straightforward guide to new car leasing. We explain the differences between HP, PCP and PCH, and explain which might be the best for you.