The money or the car? Think before you drive

The many thousands of motorists who rush to buy the latest P registration cars, available from 1 August, will cast envious glances at those who drive away gleaming new machines from the forecourts courtesy of their employers.

But while having a company car still bestows a certain cachet, employees can pay dearly for the privilege through an extra tax bill. "It's quite common for employers to give their staff a choice. A lot of companies will pay an increase in salary instead of a car," says Jeff Thomblin of London-based accountants Wheawill & Sudworth. Cash or car is the big question.

"A company may pay all the costs of the car, servicing it and paying for wear-and-tear. But some may ask for a contribution. For example, a lot of company schemes ask employees to pay an excess of pounds 50 to pounds 200 if you have a prang, while others don't. This would also affect the total cost to the employee."

If you were to run your own car, how much would you pay taking into account initial cost, depreciation, servicing, repairs, road tax, and all the other costs - particularly insurance? Insurance is one of the big costs for motorists who buy their own car. It can vary enormously depending on who you are - your job, age, sex, where you live, whether your car is in a garage. In addition, if you are switching from a company car to your own car, you would need to look for an insurer prepared to give a no-claims discount based on claim-free years while driving the company car.

It is possible that the costs of running your own car come to more than the tax penalty for having the same vehicle as a company car. In addition, would you run the same flashy car? Or would you buy a smaller, cheaper, possibly secondhand car?

Another big consideration is whether you actually use your car for work. The business mileage you do affects the tax you pay on a company car (see below). And if instead you opt to buy your own car you would need to find out what mileage allowance your company would pay you for business use. The Inland Revenue has set tax-free mileage rates for business use of your own car. On the first 4,000 miles you can get up to 27p a mile for cars up to 1000cc without paying tax on this money; up to 34p for cars between 1001cc and 1500cc; 43p for cars between 1501cc to 2000cc; and 61p for cars over 2000cc. On each business mile over 4,000, these rates fall to 16p, 19p, 23p and 33p respectively. Anything you receive in excess of these rates is taxable. But if your employer pays less than these rates, you can claim the difference as an allowable expense to reduce the amount of tax you otherwise pay .

Finally, if you are considering swapping a car for a pay increase, remember that the increase is taxable. A pounds 4,000 rise would be worth pounds 2,400 in take- home pay to a higher rate taxpayer. Over four years - which could be the life of the company car alternative - it would then be worth pounds 9,600. But there could be an extra boost with the cash alternative. Your company pension and life insurance may be linked to the pure-pay elements of your package.

"Whether it's worth taking the car or the salary increase depends on individual circumstances," says Christopher Lane of London-based accountants Kingston Smith. His firm charges pounds 40 plus VAT to run figures through a computer program to determine whether the car or cash is preferable. You can also get a break-even figure, useful for negotiating a salary increase with your employer.

o In this new series we will be looking at what companies might offer their staff on top of their basic pay - benefits-in-kind (in taxspeak) or perks. Are perks worth having? Should you ask your trade union or staff association to negotiate more? Or are you better off asking for cash? Next week: Employee share schemes.