Three Questions to Ask about Your Company Car Allowance

Written by mBurse Team Member Sep 6, 2021 7:08:00 AM

Company car allowances policies are often some of the most overlooked policies in the organization. But these policies are more important than many people realize.

Whether you are a business owner, a manager, or a driver who receives a car allowance, it is important to make sure you periodically review your company's car allowance policies. Asking these hard questions now can prevent unfair policies that push good employees out the door.

3 questions to ask about your car allowance

1: When was the last time you changed the amount of your car allowance?

If it’s been more than five years, you may be in trouble. If it’s been more than ten years, you definitely are in trouble. (We’ll explain below.)

2: What generated the rate or amount of the car allowance?

If you don’t know the answer to this question, that’s a problem. If you do know the answer, and the amount wasn’t based on actual data about employees’ expected travel expenses, that’s also a problem.

3: Is your car allowance a standard amount, or is it tailored to specific employee needs and roles?

The way you answer this question could say a lot about your commitment to maintaining equitable policies and practices. Different employees incur different amounts of business vehicle expenses based on where they live and how much they drive. A good policy will reflect this reality.

3 qualities of a fair, effective car allowance policy

A car allowance should be:

  1. Flexible and reviewed regularly
  2. Based on accurate, relevant data
  3. Customized to individual needs

Ignoring those criteria? Your allowance is not competitive. It's probably not fair, either. And it is almost certainly costing the company in numerous invisible ways.

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Traditional car allowance plans are based on a one-size-fits-all model. But in reality, different drivers experience different operating costs and territory sizes. Businesses today need the tools to craft flexible car allowance policies based on accurate, relevant data.

Mobile employees operate on a system of trust. They trust the company to ensure that their business needs are met. Car allowances instill that trust as team members travel to meet clients and move between locations. If they have to travel using their personal vehicle, a robust allowance lets them know their income will be protected from the volatile costs of owning and operating a vehicle.

A car allowance is also a big piece of the recruiting process. The amount and the way it is derived can make your organization stand out, steering top talent your way. Or it can have the opposite effect. If a company offers candidates a $500/month taxable car allowance, which may equate to as much as little as $306 after taxes, candidates know that their allowance may not cover their expenses, especially if they live in a high cost territory or cover a broad territory. 

In some places, even a $600/month taxable allowance, which is just above average nationally, can fall well short of what's needed – or even violate labor laws. Eliminating those taxes is one way to bring an immediate gain to both the employees and the company.

According to our annual survey, nine out of ten mobile workers weigh their costs against the car allowance before accepting a new position. If candidates hear an arbitrary number that does not take into consideration each employee’s territory size or territory costs, then they will likely rank your offer lower than your competitors’ offers.

Calculating a more competitive car allowance

Forward thinking companies provide an up-to-date reimbursement calculated using cost data. It is important to examine the relative costs of different territories – fuel, maintenance, taxes, etc. It is also important that the allowance amount account for territory size as well. Providing an allowance with a transparent basis instills confidence in new hires that they will be treated fairly and consistently.

The amount of the car allowance not only impacts recruiting new talent, but retaining existing team members. When drivers incur different levels of expense but receive the same allowance, they know it's not fair. Morale may dip. Employees who get the short end of the stick may look elsewhere to find an employer with a more competitive reimbursement plan. Instead of attracting top talent, you lose it because of an out-of-date car allowance.

Time to update your car allowance program?

According to recent mBurse surveys (2017, 2018, 2019), most car allowances have not been changed in years. Gas prices fluctuate and inflation occurs, but the car allowance stays the same. Insurance costs climb, but the car allowance stays the same. Territories expand, but…you get the picture.

Re-evaluating your car allowance does not have to mean spending more. Often you can achieve great results simply by removing unnecessary tax waste from your existing policy. Our tax savings calculator can help you predict how much the company would save and the employees would benefit.

At mBurse, we specialize in crafting fair and flexible car allowances that can be paid as non-taxable reimbursement.

The ultimate guide to paying a car allowance or mileage reimbursement

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