Step 1: Show Me The Money!

It may seem obvious, but the first thing that you need to know is 'How much?'.

That phrase encapsulates:

• The type of cash alternative you will get/may want.
• How the alternative is calculated.
• What the alternative is meant to cover.
• How the alternative will be delivered.

If you switch to a cash allowance you'll have costs for:

• Financing your next car
• Depreciation
• Servicing and maintenance, plus breakdown cover
• Insurance (not just for accident damage but possibly also for finance repayments, tyres, etc)
• Fuel
• Tax and national insurance on your allowance

One way or another your cash allowance will have to cover all of the above costs, otherwise you're going to be out of pocket.

However, your employer may not deliver the cash you need in a straighforward manner to enable you to check the condition of your wallet after taking the cash.

For example, here are some of the ways you could be paid to opt out of your company car:

• Monthly cash allowance only
• Monthly cash allowance and mileage allowance for business travel
• Monthly cash allowance and fuel reimbursement
• Monthly cash allowance and fuel card
• Mileage allowance for business travel only

And there are derivatives of all the above to consider as well.

For example, on the one hand your employer may pay a flat rate monthly cash allowance and a business mileage allowance, and compensate you for any extra taxes you have to pay on the cash allowance compared to a company car.

That's great, your employer is making sure you don't lose out when moving to a cash allowance.

On the other hand though, your employer may instead just pay a monthly cash allowance and reimburse business fuel costs, then expect you to pick up any changes in taxes in return for the freedom to choose any car you like (rather than be restricted to the choice list in your company car policy).

Either way, you need to scrutinise the proposed cash allowance arrangements quite carefully.

Fortunately we have a calculator that will do the hard work for you.

If you need to check your allowance, or a combination of allowance and mileage reimbursement or fuel card, or you just want to see how much you would need to give up your current company car, click on this link.

Step 2: Profit or Loss?

There are typically two key reasons for an employer implementing a cash alternative to company cars;

• cost savings compared to providing company cars; and/or
• improved offerings for recruiting/retaining staff.

However, it would be understandable if all you're really concerned about is whether you will win or lose from a cash allowance or opt-out deal.

Now, you could win by your employer offering you a cash allowance that's generous and leaves you financially better off.

Alternatively, you could win by getting a car that's closer to your requirements than the standard offering on the company car choice list.

Or you could lose because your employer's allowance does neither of the above.

Either way, you need to test the maths to work out whether you win, either from a cost perspective or from getting a more suitable car from your cash allowance.

How To Quantify Costs

So, to do the maths you will need to:

1. Estimate the total mileage you will travel each year and the business proportion of this.
2. Calculate the tax relief you will get on the business mileage.
3. Work out your net monthly cash allowance (including any mileage allowance or fuel cost reimbursement) after tax and NIC, taking account of the tax relief for business motoring.
4. Compare the net cash allowance/mileage allowance to your running costs for the car you want.
5. Smile or cry according to the results.

You can take a short cut through all of this with our PaySwap^tm cash allowance calculator.

PaySwap^tm will do all the maths for you, irrespective of whether you know how much cash you will get.

PaySwap^tm will also show you cars you can get for the money you've been offered and work out if the car you want is affordable.

And once you've done the maths, you're ready to start the next phase of paperwork ....

Step 3: Check The Paperwork

The old adage 'the job's not over 'till the paperwork's done' could not be more apt than when it comes to taking a cash allowance instead of a company car.

You will need to read carefully your employer's terms and conditions for the cash allowance, for example:

• What is it intended to do?
• What does it cover?
• Exactly how much will you get?
• Is it pensionable or eligible for overtime or other pay related benefits?
• What are your rights if arrangements leave you out of pocket?
• Once you've left the company car plan can you return to it?
• What happens if you leave your employment through redundancy or getting a new job?

Irrespective of whether or not your employer is assisting with the supply of the car or finance/maintenance, read all contractual documentation (car purchase terms, finance agreement etc) thoroughly - it may be painful, but these are usually legal documents and if you don't understand them you probably shouldn't be signing them.

Pay particular attention to:

• The type of contract for the car - is it a lease or purchase agreement (and be careful with leases - these can cause problems with taxation if your employer is involved in the setting up the arrangements)
• Any contractually required monthly finance, maintenance, insurance and fuel costs
• Penalties for cancelling agreements early
• Additional costs on completion or termination of any contracts
• Any amounts guaranteed for future car values in PCP or other finance agreements
• Return condition clauses for vehicles (e.g. penalites or excess mileage/wear and tear charges)
• Exclusions from your motor insurance, especially if you carry goods/samples for work
• Items covered/excluded from maintenance and breakdown recovery agreements

Step 4: Into Your Car

So now that you know your budget for opting out of a company car you can get started on finding a car to meet your needs and your budget.

You might be tempted to simply take the same car you would have had in your company car plan, and if this meets your needs and budget then that's fine. If not then we have tools to help you.

Our tools let you search for cars by the net spending power of your monthly cash allowance after tax and national insurance contributions and also factor in your requirements for vehicle specifications (doors, engine, gearbox etc) plus standard equipment.

So, now you've chosen your car and you're ready to get motoring.

Whoa! Not quite yet. This time you're taking delivery of your own car. You're responsible for it, you make the monthly payments and if it goes wrong you're the one who'll be sorting it out.

So, when you take delivery of your new car, make sure you:

• Examine the body work - check for pre-delivery damage such as stone chips to the paint or scuffs to the interior, exterior or wheels and tyres.
• Check everything's there - make sure everything you ordered as factory or dealer options has been fitted and double check items such as the toolkit, spare wheel/tyre inflation kit and that you get all the keys.
• Get the delivery driver to show you that everything is working - all equipment, options, lights, in-car entertainment etc, and don't accept excuses that the driver needs to get away to the station to make a train.
• Drive it - and not just to the station to drop off the delivery driver - to make sure there are no obvious defects in the way the car runs.

And remember that delivery is just the beginning.

You're now responsible for insurance, servicing and maintenance, renewing the tax disc, making sure that warranty work is done, that manufacturer recalls are processed and that the car is kept in a roadworthy condition, especially when it's being used on business travel.

And there's one more factor to consider ...

Taxation.

With a company car the taxes are typically computed for you. Your employer sends details of your car to HM Revenue & Customs and they adjust your PAYE code to catch the tax due every month through the payroll.

When you take a cash allowance you will need to sort out the tax arrangements; first job is to tell the tax office that you no longer have a company car, which will increase your PAYE tax code (that's a good thing), as the company car benefit will no longer appear.

The next job will depend on how your employer is providing your cash, for example:

1. You get a mileage allowance to cover business travel and this is in line with the full rate of HMRC's mileage allowances; there's nothing more to do.
2. You only get a mileage allowance to cover fuel on business travel; then you may be entitled to claim additional tax relief for other costs such as depreciation, maintenance and insurance.

If you are claiming tax relief direct with HMRC under 2. above, you don't have to wait until the end of the tax year to make a claim.

You can ask for your PAYE code to be adjusted at any time during the tax year to take account of your forecast business mileage for the year and get the benefit of paying less tax each month through the payroll.

Step 5: And Out Of It Again

Eventually it will be time to change your car, and this means going through Steps 1-4 again.

Check that the terms of your employer's cash allowance haven't changed, and get familiar with the changes if they have.

You'll also need to deal with the return process for your car, depending on what type of finance deal you took to fund the vehicle.

Irrespective of how you financed the car:

1. Check the service log book has been marked up for all your service history and get any missing stamps in the book.
2. If your car will be returned around the 3rd, 4th or later annivesary of the initial registration, ensure you book an MOT test in time to get any defects fixed before the car is returned.
3. If your car is still under a manufacturer's or other warranty get the MOT inspection well before the warranty expires in case you need to make a claim for items that fail the MOT.
4. Get the car checked for damage to the bodywork, wheels, interior or equipment - you may be charged by your leasing/finance company for returning the vehicle with excessive wear and tear to these items. If necessary, liaise with the lender to have an appraisal before the vehicle is sent back

If you've taken a PCP finance deal, check the current market value of the vehicle.

If the car is worth more than the final payment/minimum future value in your PCP agreement you may have money in the car. You can roll this money forward into the cost of your next car, either by selling your existing car privately or using the surplus value as a trade-in deposit towards the next one.

If the car is worth less than the final payment/minimum future value in your PCP agreement then, as long as this is not due to excess wear and tear, with typical PCP arrangements you can simply hand back the car and that's the end of the deal as far as you are concerned - the 'loss' is the dealer or finance company's responsibility.

And finally ...

And Finally ....

Swapping to a cash allowance is only the beginning; effectively you're stepping onto a merry-go-round and whilst you're on the ride things elsewhere might have changed.

So, as with any aspect of employment, make sure you keep up-to-date with:

• vehicle models and fuel types - the market is changing radically right now with hybrid and electric vehicles coming to the fore;
• employment and tax law revisions - the tax rules which might have made a cash allowance favourable when you took it could have changed by the time your car is being replaced; and
• employment practice - employers will change their policies and procedures about company cars and cash allowances in response to market behaviour and employment/tax law.

Remember too that this article is focussed on the key steps involved in taking a cash allowance. There's a lot more detail to be covered when you embark on the process, so check all available sources of detailed information and analysis at every stage.

Don't be afraid to ask for help!