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Company car schemes: An in-depth guide. By Matt Henkes


Company cars have become a common benefit in the modern workplace. Whether essential for travel or solely for the purpose of status, there are many options open to employers. Leasing companies are willing to walk you through the complex issues involved, whether you’re wrestling with tax implications or considering if your fleet should be finished off in metallic pink.

There are two main types of scheme, status schemes and essential user schemes. Essential user schemes are for workers whose job necessitates a lot of travel, such as sales personnel, who can generally drive anywhere from 3000 to 18000 miles a year on company business.

Status schemes do exactly what they say on the tin, and are used where the possibility of a company car can be an effective recruitment or performance incentive. Status schemes have several benefits from an HR perspective. They confer status on successful employees, and can be attractive to potential applicants. In terms of cost, such schemes are a controllable way of distributing rewards that does not directly increase a company’s wage and pension bill.

The tactic is widely used among many large UK companies, though such schemes are not simple things to instigate.


There are a range of decisions that need to be made when setting up a scheme. For instance, the list of available vehicles needs to be drawn up. It’s worth considering at this point whether you wish to use company cars to reinforce your corporate brand, possibly by restricting the choice to a certain model, colour or number of windows.

This tactic is likely to be more effective on essential user schemes, as a limited choice may restrict the incentive value of a status scheme. The benefits offered by competitors may also influence the decision making process.

The size of your required fleet will have a massive bearing on whether cars are purchased or leased. While contract hire has been more popular with larger companies for years because of its flexibility and maintenance advantages, smaller fleets are increasingly turning to outsourcing companies in order to take the stress out of their fleet management. Outsourcing firms take responsibility for keeping up to date with all the legislative changes involved with a scheme, not to mention the added advantage of having replacement vehicles readily available in case of breakdown.

Lease Plan is one company that offers such services. “Besides the substantial financial argument in favour of leasing, small companies should also think of the saving that can be made in man hours by outsourcing the running of a fleet to a specialist,” it says.

Tax: A Gordian knot

The tax regulations on company cars were restructured in 2002 with their emphasis changed from engine size, to where the vehicle fits into the pollution index. This means that cheaper, lighter and more efficient vehicles will generally be taxed less.

Employers really need not worry too much about this as they are only liable for class 1A national insurance tax on company car benefits.

However, for employees, the levels of taxation on their shining new company steed can vary from £155 per year, all the way up to the ceiling limit of £11,200. Trying to work out how much tax is owed can be something of a Gordian knot for your employees, though there are many internet based companies on hand to help out.

One of these is, which offers a useful facility for calculating the tax payable on specific cars, and can be used to find which models incur the lowest rates. The company’s director, Rupert Russell, says that company car tax is complicated because it is trying to do so many things at once.

“Raising revenue based on a theoretical car list price, aiming to reduce pollution by offering reductions in line with lower emissions, and at the same time throwing in a complication for air quality based on fuel type is demanding a lot,” he says. “Especially when there are almost 6,000 different models of car.”

Russell believes that tax law “does a fair job” of varying the level of tax in line with the level of pollution. He says it has encouraged car manufacturers to produce lower emitting cars as a result. “Tax regulations have not dramatically changed the administration of schemes, and car and fuel costs still need to be recorded, albeit in a different format,” he adds.

Alternative schemes

Some companies have begun exploring alternatives that can alleviate the tax burden on their employees, while not forfeiting the benefits enjoyed by company car drivers.

Insurance mediator, Whitechapel Corporate Services, offers its employees a cash alternative enabling them to buy their own car. But then covers all running costs such as finance, insurance, maintenance, etc. By using what is technically their own car, the employee does not have to pay tax on the benefit, and has no worries about bills, depreciation and finding large wads of cash to buy the vehicle in the first place.

When Canada Life abandoned its company car policy for more than 200 of its employees, it struck a deal with a leasing company that established a series of personal contract purchase arrangements to allow those employees to continue enjoying the benefit of a company car with few of the negatives.

However, in today’s environmentally conscious times shouldn’t the emphasis be on encouraging employees onto public transport and sustainable conveyances such as bicycles, skateboards and even, heavens above, walking?

The Confederation of British Industry (CBI) estimates that road congestion costs the UK economy between £15bn and £20bn every year. And with traffic levels predicted to continue rising, companies are being encouraged to find alternative transport for their employees.

Sustrans, an organisation that promotes sustainable travel in the UK, says that the benefits of moving your employees from cars to bikes are numerous.

Providing bikes is going to be vastly cheaper than investing in cars, not to mention the added bonus that employees on bikes will no longer be delayed by tailbacks, snarl-ups or jack-knifed pork-pie lorries. Sustrans says that you can fit up to 16 bikes in the space taken up by one car parking space, and adds that the health benefits of increased exercise are likely to benefit the productivity, morale and retention of your workforce.

One company that has had notable success in alternative transport is Boots. The firm has received recognition as an innovator for its employee commuting schemes. It encourages employees working at its head office to use the 100 buses that stop at the complex, half of which are subsidised by the company. It says over 400 of its staff also cycle to work.

Despite this, Boots still operates both a fleet and status scheme. Companies seem reluctant to do away with their company car benefits, and employees even less so.
That view is backed up by a survey conducted by contract hire firm Godfrey Davis. It said that more than 70 per cent of companies approached said that getting shot of status company cars would adversely affect staff recruitment, while one in four said that staff using their own cars on company business could damage their image.

“This in an indication of how company car provision is valued,” it said. When given the choice, most eligible employees will choose to have a company car.

By Matt Henkes

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