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What is a Personal Car Contract?

By: J.A.J Aaronson - Updated: 25 Nov 2010 | comments*Discuss
 
What Is A Personal Car Contract?

In 2002 the government demonstrated their intention to encourage the migration from traditional high emission company vehicles to 'green', low CO2 modes of transport. This has taken various forms, including the introduction of new tax benefits for those who cycle or take public transport to work.

Perhaps most important, however, has been the redrawing of the tax schedule for company car use. Previously, the use of a company car was taxed with reference to mileage and vehicle value. Today, however, the emphasis is shifting further towards CO2 emissions; those with lower emissions attract a lower tax liability.

This has meant that traditional company car arrangements are becoming less economically viable. In response to this, many employers are encouraging their staff to take advantage of personal car contracts, also known as Employee Car Ownership Schemes.

ECO as a Funding Method

Employee Car Ownership is an alternative to traditional methods of funding a company car fleet. Traditional methods have included outright purchase or hire lease, but these are becoming less affordable in tax terms. Most traditional funding methods worked on the principle that the car would not be the personal property of the employee, but would remain the property of either the employer or a leasing company.

Companies wish to retain their company car benefits as they have significant advantages for both employer and employee. Employee Car Ownership offers a means by which this can be achieved; the employer gains the use of a car, while employers can offer their increased purchasing power as part of their benefits package.

Employee Car Ownership relies on individual employees managing their own monthly budgets. It draws on a number of sources of finance to enable employees to enter into a lease contract, with a view to potentially buying a vehicle outright upon expiry of the lease. The bulk of this budget is accounted for by a monthly allowance paid by the employer to the employee.

This is commensurate with the pay grade and seniority of the employee, and replaces the expenditure that would have been incurred if the company operated its own fleet. The employee then adds their own personal tax savings to this (that is, the money that they have saved as a result of avoiding the tax liability incurred by a benefit-in-kind company car), as well as the mileage allowance granted by their employer or HM Revenue and Customs.

In reality, the mileage allowance is a key element in an Employee Car Ownership contract; unless the employee is exceeding 10,000 miles per annum, it is unlikely that this source of funding is the most cost effective.

Multiple Funding Options

For employers, one of the great advantages of Employee Car Ownership arrangements is that all payments are off balance sheet as the contract exists between the lease company and the employee. However, a tax liability will still exist for any cash allowances, as these are treated as a salary-related benefit in kind and are accordingly subject to income tax and National Insurance Contributions.

If you are an employer considering options for funding a company car fleet, you may wish to consider a mixture of funding options; Employee Car Ownership may be suitable for some, but not all, of your employees, and other options are available on a 'mix and match' basis.

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