Car Allowance - How to Determine the Amount
In an organisation, company car is usually provided, either as a fringe benefit, or based on job requirement of an employee. When a company car is provided, the maintenance fees, annual insurance and road tax, as well as petrol expenses will be borne by the organisation.
Nowadays, in order to reduce the administration work of maintaining company cars, most organisations provide car allowance, in place of company cars. When car allowance is considered to be given, it is usually the Human Resource’s responsibility to come out with the amount. How can HR determine a fair amount for car allowance? Here are some tips:
When an organisation provides a company car, the expenses will include the purchased price of the car, the total interest incurred from car loan (if it is hire-purchased), the annual insurance and road tax of the car, as well as the maintainance fees, petrol expenses, etc.
To come out with a fair car allowance, the Human Resource Department can convert the estimated expenses incurred on company car during a certain period of time, into monthly car allowance. In order to do this, the following expenses shall take into consideration:
1. Car Purchased Price
If there are employees with different job grades, different car budget shall be allocated to different grades. Therefore, there will be different amount of allowance for different job grades.
2. Car Annual Insurance
3. Car Annual Road Tax
4. Total Interest Incurred from Car Loan
5. Maintenance Cost
The above expenses (2-5) shall be based on a certain number of years, for example, 6 years.
For interest, it shall also be based on the estimated loan amount, for example, 90% from the car purchased price.
Maintenance cost could be based on historical record, or information obtained from any car service centre. Different cc of car will have different maintenance cost.
6. Car Re-sale value, provided company car is sold after certain years.
The total expenses incurred for company car shall be the total of item (1) to (5), minus item (6). The monthly allowance shall derive from the total expenses divided by total number of months, which the total number of month shall be the period that used to estimate the total expenses.
Besides the above, depending on the tax structure of a country, the company might take part of the additional tax imposed on the employees, as a result of the car allowance given, into expenses. In this case, the company will bear part of the tax via car allowance given.
