A generous mileage allowance can cost less than a company car

Company car or mileage allowance?

Suppose an employee drives 25,000 kilometres a year, of which 12,500 are business and commuting kilometres. The employer is considering providing a company car that the employee may also use privately. An alternative is an allowance of €0.50 per business and commuting kilometre actually driven.

For the company car, this example assumes €800 per month for lease and fuel for a compact mid-range car (list price €30,000). On top of this come €99 per month in employer's contributions on the taxable benefit (bijtelling) and €67.50 per month in VAT on private use. Total employer costs therefore amount to €11,598 per year.

With the mileage allowance, the employee receives 12,500 kilometres × €0.50 = €6,250 per year. The calculation also allows for €2,500 in final levy (eindheffing) should the discretionary allowance (vrije ruimte) under the work-related costs scheme (WKR) be exceeded. Total employer costs therefore come to €8,750 per year.

In view of the actual costs of running a car, we do not consider a mileage allowance of €0.50 to be unusual within the meaning of the customary practice test (gebruikelijkheidstoets) under the WKR.

The key figures at a glance

A difference of almost €3,000 per year

In this example, the company car costs the employer €11,598 per year, compared with €8,750 for the mileage allowance. The difference is €2,848 per year in favour of the mileage allowance.

This example shows that an allowance of €0.50 per business and commuting kilometre, despite the substantial amount per kilometre, can be cheaper for an employer than providing a company car.

Further advantages for the employer

The financial difference is not the only advantage. When employees use their own car, the costs associated with owning and privately using that car in principle remain with the employee. The employer reimburses only the business and commuting kilometres actually driven, at the agreed mileage rate.

• No costs for excessive private use. Additional private kilometres in the employee's own car are not at the employer's expense.
• Costs move in line with business use. Fewer business and commuting kilometres automatically mean a lower allowance.
• Less administration than with a company car. The employer does not need to manage a lease car. Administration is limited to recording and reimbursing business and commuting kilometres.

A mileage allowance can therefore be not only financially more advantageous, but also simpler and easier for the employer to manage.

Sufficient discretionary allowance? Then the difference may be greater

The calculation assumes that the employer exceeds the discretionary allowance under the work-related costs scheme and therefore pays €2,500 in final levy. If sufficient discretionary allowance is available, this final levy falls away in the worked example. The employer's costs for the mileage allowance then fall from €8,750 to €6,250 per year.

The available discretionary allowance can therefore play an important part in the final costs.

What does this mean financially for the employee?

The choice also works out differently for the employee. With a mileage allowance of €0.50 per business and commuting kilometre, the employee in this example receives €6,250 per year. That is roughly €521 net per month. In addition, the employee is not subject to the taxable benefit (bijtelling) for private use of a company car.

* In this worked example, the employee therefore has €793 more net disposable income per month. The employee is, however, responsible for all car costs, including depreciation, maintenance, insurance and fuel.

Look at the total costs

An allowance of €0.50 per kilometre may seem high at first glance. This example shows why it is sensible to look not only at the amount per kilometre, but at the total costs to the employer. The number of business and commuting kilometres, the cost of the company car and the discretionary allowance available under the work-related costs scheme all affect the outcome.

It can therefore pay to compare the various options before offering a company car. With a mileage allowance, the employer pays only for the business and commuting kilometres actually driven. Additional private use of the employee's own car remains at the employee's expense. In a situation such as this example, this can result both in an attractive allowance for the employee and in a clear cost saving and less management for the employer.

Want to know more?

Would you like to know more about choosing between a mileage allowance and a company car? Please get in touch using the contact details below.