A company car is one of the most desirable benefits that an employer can offer. With the cost of car ownership constantly rising, offering to fully fund or partially fund an employee’s car can provide huge financial relief.
There are a few different types of company car schemes that you can consider. This post explores 5 of the most common company car schemes to help you determine which is the best option for your employees.
Contract hire
A contract hire agreement involves leasing a car for a set period. The employer leases the car from a leasing company and provides it to their employee to drive. At the end of the lease period, the car must be returned to the lease company.
Because neither the company or the employee owns the car, this type of scheme does have its limitations and drawbacks. The contract hire period is usually 2 to 3 years – so your employee doesn’t get to enjoy the car forever. The lease company may also restrict modifications and ask that you stay within a certain mileage limit.
Contract hire schemes can however come with cheaper monthly rates. There may also be the option to include a maintenance package – this is when the lease company offers to cover servicing and certain repairs.
Contract purchase
A contract purchase is similar to a contract hire agreement, but has one major difference – at the end of the contract term you have the option to buy the car. The lease payments go towards paying the car off. You or your employee must then pay the remaining amount (balloon payment) to own the car.
This option provides a certain amount of flexibility. You or your employee has the option to eventually buy the car if they become attached to it and you/your employee has the money to purchase it. Alternatively, you can return it if your employee is not interested in keeping it or neither of you has the money to buy it.
Finance lease
A finance lease is similar to a contract purchase, but can often have even cheaper monthly rates because you are only paying for the vehicle’s depreciation during the term. Finance leases are also fully tax deductible.
At the end of a finance lease, you or your employee has the option to pay to own the vehicle, return the vehicle or trade the car for another vehicle. Finance lease terms may vary slightly, so it’s worth always reading them closely to know exactly what you’re getting into.
Salary sacrifice
A company car is one of the most common salary sacrifice benefits for employees. This is when an employee agrees to cut their salary in exchange for an employer financing a car for them. The reduction in monthly pay may be equal or less than the value of the monthly car finance payments. An employer may also agree to cover other costs like repairs, servicing and fuel.
A salary sacrifice can be used as an alternative to a pay rise. Instead of upping their pay, you can offer to pay for a company car instead. This can be a good solution if a pay rise is likely to involve them moving to a higher tax band – they can stay at their current salary, but enjoy the benefit of more disposable income by having their car paid for instead.
Outright purchase
Another option is to buy a car outright and give it to your employee to drive. You can retain ownership of the car, or you can gift it to your employee and allow them to be the owner.
This is likely to be the most expensive option for your company. However, if you want to truly reward an employee, then it is also the simplest option. Of course, when allowing them to choose a car, you still get to set the budget limit. If it’s a car that is to be used for business and personal use, you may also still want to have a say in what model it is, so that it appropriately reflects your brand.
Conclusion
By taking the time to explore different company car schemes, you can choose a scheme that is affordable for you, while also being convenient to you and your employee. In each case, it is up to you as to how much you choose to fund and how much your employee pays for – some employers are generous enough to pay for fuel and repairs on top, while others only pay for monthly finance installments.