How to write a car allowance policy

For any business, a car allowance is a great opportunity to provide flexibility for your employees when it comes to commuting to work or for work-related travel. It’s a great fit for many businesses, whether it’s a monthly car allowance or a one-off payment—there are perks to having it for both parties.

With that in mind, this article will explain car allowance policies in more detail. It’s useful to understand how a policy is drafted together and how it might differ from one employee to the next.

With more and more remote workers and traveling employees than ever before, a car allowance policy is a must when considering employee contracts and business needs. 

What is a company car allowance policy?

A company car allowance policy details the structure of the car allowance that’s offered to the employee by the employer.

Car allowances can be great for staff retention and for giving your workforce the cash sum they need to buy a car for work. Whether they have some level of personal use or it’s used for business purposes only, it can certainly be a helpful perk to provide.

With that being said, there are certain questions to ask before you create the policy. 

• What should the employer be responsible for reimbursing? 
• What other expenses should be covered in this allowance? 

Different companies demand different requirements from their car allowance policy—it’s important to tailor the policy to your specific business needs. After all, no two budgets are the same and related expenses such as vehicle depreciation, wear and tear, and car insurance also need to be considered.

What is the car allowance policy made up of?

The policy itself is made up of multiple sections and will typically be in the travel section of an employment contract. Having a structure to the policy will make it easier to set-up. These sections include:

• An introduction to the policy and the company’s values
• The eligibility of the employee and the allowance given
• Mileage allowance rate / mileage logs and provision of car
• Changes to contract including termination and business expenses processes
• Safety and duty of care

Creating an auto allowance policy and examples

There are many different templates for car allowance policies online. As long as you follow the sections mentioned above, then you should have no issues with missing anything out. We’ve broken down the sections into more detail to help, along with some brief examples.

1. Introduction

The introduction to the policy will outline what the document entails and the company’s values that are deemed appropriate to mention. This may refer to how the organization values its employees and the fairness they provide to each and every staff member.

2. Eligibility

Depending on the business, not every employee will get an allowance. For some, it’s simply not necessary and so there’s an eligibility process in place. Plus, employee positions within the company will usually dictate how much someone receives in car allowance.

For example, you may have executive level individuals that will receive $15,000 whereas a middle management role will get $10,000. There’s usually a number of categories into which the employee will fall.

There may be certain conditions you want to introduce if the employee decides to lease a car. Leasing a car can require sticking to a certain number of miles and insurance premiums can vary depending on the driver. All these vehicle expenses will be included within the car allowance offered, so it needs to be a suitable choice for the business and the budget available.

3. Mileage allowance rates and provision of car

As mentioned below, there’s certain mileage rates and reimbursement that can be added to the car allowance provided. The provision of the car explains how it’s the employee’s responsibility for the maintenance and general upkeep of the vehicle.

For example, a company may choose to offer $10,000 to cover the cost of the car whether bought outright or financed. This cost also covers maintenance whenever necessary, fuel, and wear and tear.

4. Changes to contract

There’s always a need to put a clause in the policy that details the process for making changes to the contract in case of termination. As a business, it may be important to cover your back in the event that a car allowance is no longer required. This might be because there’s no longer a need for it or it’s proving a financial strain on the company.

These terms are critical to include in the policy in the event that changes need to be made.

5. Duty of care and guidance on safety

As a business, an employer has a certain amount of responsibility when it comes to ensuring the safety and care of the workforce. When an employee is given a car allowance, there should be guidance on safety and how to handle the vehicle in a manner that reduces the risk of injury or accidents. 

Adding on mileage reimbursement 

When offering a car allowance, the cash payment usually covers running costs like fuel and other maintenance costs. Some businesses may wish to also provide a business mileage reimbursement policy, depending on what budget is available. It’s not necessary to do so but might be beneficial in some cases.

The reason why it can be helpful to offer business mileage reimbursement is due to some of those business miles being tax deductible. So when it comes to paying up with the IRS, or HMRC for those in the UK, it could save your business money. This is what’s also known as a FAVR plan.

For the US, the mileage reimbursement rate currently sits at 56 cents per mile. The standard mileage rate for the IRS can be found via their website here. This is a figure that’s updated annually.

In the UK it’s 7-14p per pile depending on the vehicle’s fuel and engine size. This is reviewed by HMRC quarterly and can be found via their website here.

How a car allowance policy differs by rank

When you’re creating a car allowance policy for company employees, what you offer might differ depending on someone’s position in the company. 

With that in mind, it’s important to create a fair policy—a middle manager could be doing more travel for work than a CEO or executive. At the same time, it’s important to reward those c-suite level employees too. It’s a balance that every business should aim to get right in order to provide a fair and functional work environment.

Like a salary is subjected to income tax, the car allowance amount is given on top of the employee’s salary. It’s worth querying what amounts should be offered with human resources to make it fair.

A car allowance policy can be useful when a car is required for business use and, in a way, relieves the business of a responsibility towards the vehicle.

Implementing a car allowance policy

Some businesses provide a car allowance through a monthly amount and others as a lump sum. Whether you offer the monthly allowance or all of it in one go, is very much up to you as a business.

When implementing a car allowance policy, it’s important to personalize down to the individual in question. If it’s a personal vehicle that the employee needs, then a car allowance policy is likely the most useful to have in place. There are other options, such as a company car, that you can consider if the vehicle is mostly used for business travel. 

For some staff, it might be ideal to have their own car. For the business, it might be better to own its vehicles rather than offer an allowance. Either way, there’s plenty of choice when offering travel benefits in the organization.