Car subscriptions offer a new way of providing company cars which can work well for both employers and employees.
A car subscription is halfway between a lease and long-term car rental. You or your employer can pay for a car (or a van) from 28 days to 36 months, with the ability to get exactly the car you want, change it when you like – subject to conditions – and have insurance and maintenance included.
Unlike a lease there is no major upfront charge (such as nine months’ advance payment) but the monthly charges are higher than a fixed-term lease. There are also short-term leases on offer – between three and 12 months – but the choice of car may be limited. In all cases, neither you nor your employer own the car or will have the option to do so.
Vehicle subscriptions for employers
Traditionally employers have run company car schemes which fall into three types; company-owned vehicles, employee car allowances or an employee salary sacrifice scheme. We explain them here.
For business owners and fleet managers, using car subscriptions is suggested as a way to have a flexible fleet of vehicles which can be quickly scaled up or down without being tied into lease cycles of several years. There are no ‘start-up’ costs to buying a fleet of cars, then taxing, insuring and maintaining them. You can also use them to make a job offer more appealing.
“The modern working world has changed immeasurably in the last two years,” says Duncan Chumley, chief executive officer of our partner, Mycardirect. “A car/van subscription gives your company the agility to change with it. Car subscription offers short term contracts that can be cancelled any time, so if your business is disrupted by external forces, you aren’t stuck with a fleet of company vehicles gathering dust, unused and unwanted.”
Subscriptions could be offered to contractors on temporary contracts, or new staff still in their probationary periods. New businesses may not be able to afford large downpayments on the start of a traditional lease and may not yet have a good credit record. This also applies to commercial vehicles.
Now, with the current delays on new cars (2022), a subscription or flexible short term contract can cover shortfalls in a vehicle fleet while drivers are waiting for a particular car to arrive. Subscriptions provide the opportunity to change cars and try out different models, which traditional leasing can’t offer.
Most providers allow you to swap between cars and vans and some may be set up to administer subscriptions for business users with for example one invoice for subscriptions for a number of cars and favourable rates. Dependent on the company’s financial set up they can claim back VAT (in line with HRMC rules), which is why the subscription is in the name of the employer as the agreement is taken out in the company name.
Subscriptions from the employee’s point of view
You may be driving a subscription car – or more likely a van – just for work, but when a company car is made available for the private use of an employee a Benefit in Kind (BiK) value is calculated in relation to the value car (and to the fuel if that is also made available for private use). As subscription cars are subject to change, like any company car it is up to the company/employee to advise the HRMC of the car that the employee is driving.
Under salary sacrifice the cost of the subscription is taken off your pre-tax salary. You don’t pay income tax or national insurance contributions on the portion of your salary you have ‘sacrificed’. You still pay a BiK based on the value of the car and the private fuel it uses
The traditional company car allowance is a cash sum which is added to your salary, to subscribe to a car of your choice. You are charged tax on it as additional salary, not as a BiK, although you need to keep your own records of business mileage versus private mileage. A business mileage allowance may be available in addition or if not offered you can claim business mileage against tax yourself at a flat rate.
Using a company car allowance to buy a subscription could work to your advantage, depending on the terms your employer sets. If you don’t need a car for a prolonged period such as a month or two working abroad, you could hand the subscription car back and start with a new one when your return. You could also save your allowance by changing to a cheaper car if that suits. Remember, though, that as the subscription will be in your name you’ll be subject to the same conditions as other users, such as damage above normal wear and tear or excess mileage.
Electric incentive
Most companies having been looking at subscriptions as a way to introduce electric vehicles (EVs) into their fleet. They may have corporate policies on reducing CO2 emissions and an electric car subscription offers the chance to try out how they match the businesses’ needs and the best vehicles for the job.
There’s a big tax benefit for both sides. Users of zero-emission cars pay only 1% BiK. This means that if you have a car included with your role, both you and your employer can save money on tax. However, the tax benefit may be doubtful if you have no way to charge at home overnight because you live in a flat or have no off-street parking.
Taking advantage of the 1% BiK, some electric car providers are targeting both employers and employees. Octopus Electric Vehicles provides leases to employers – and helps them set up salary sacrifice schemes – and the employee then chooses the car.
As an EV subscription example, electric-only provider Onto has a salary sacrifice calculator. Calculated at the start of April 2022, on a subscription for a Hyundai Ioniq Premium 38kwh (list price £33,895) an employee earning £40,000 had the monthly subscription (paid by the employer) of £499 deduced from their gross pay (salary sacrifice). There is a tax and National Insurance saving of £166, leaving a monthly BiK of £11.
