back to articles | May 31, 2023 | Moses Mwangi

Categories: Vehicle & Buying Research

What Is A Car Allowance and How Can You Maximize It?

Most jobs require you to drive your car, and having an employer who offers you a car allowance is very desirable. When this offer comes around, the best thing you can do is think of the best way to spend it.


Most jobs require you to drive your car, and having an employer who offers you a car allowance is very desirable. When this offer comes around, the best thing you can do is think of the best way to spend it.

Spending your car allowance wisely revolves around considering factors such as getting an auto loan, owning a car, funding your car maintenance fee, and saving on your allowance. Making the right choices means you save more on your allowance and even allows you to drive the car of your choice with all the expenses fully covered.

What is a car allowance?

A car allowance is generally a set amount your employer pays in addition to your normal salary or wage every pay period. Car allowance is given to help you cover the costs associated with using a car for business purposes, such as fuel, insurance, servicing, registration, and other fees.

In most cases, this will be a fixed amount that your employer will specify. However, how much you decide to spend on the car and save from your car allowance depends on you. The good thing about car allowances is that you can save or spend the extra money as it is still yours.

Pros and cons of paying out car allowances

A car allowance is usually easy to manage. You won’t have to deal with the administrative hassles of maintaining, insuring, and repairing your vehicle. Employees can also choose their car and whether they want to lease it or buy it outright. That way, it offers a considerable level of flexibility for both you and your employee. Moreover, the most significant advantage is that you can use the car allowance on other things, especially when using your car.

The cons of having a car allowance are that, as the employee, you are responsible for the car servicing and maintenance. Also, it limits your mileage as employers tend to avoid covering high annual mileage.

Tips to maximize your car allowance

Going for easy-finance cars can be costly, but there are ways to make informed decisions during the process that will help you manage every dollar. Here are some great tips on how to maximize your car allowance.

1. Negotiate with your employer

Remember that most employers give car allowances to employees using company cars. If you are using your vehicle to work, you need to make arrangements with the employer to be considered for a car allowance. Through negotiations with your employer, you will be able to get a car allowance that fits your location and job role per the company policies.

2. Use your car

Another great way to maximize your car allowance is to consider using your car. When using the company's car, it would be difficult to maximize the allowance as the employer pays directly for the vehicle. However, when using your car, you do not have to use your allowance on it entirely.

It would be best to keep the car costs down by using an affordable car. Getting an expensive car will only lead you to spend your entire allowance and sometimes extra cash from your pocket.

3. Sign up for chattel mortgages

Using a chattel mortgage is one of the practical and popular ways of maximizing your car allowance, especially when driving your car to work. A chattel mortgage is a loan that allows you to own the car at the point of purchase. The lender uses the mortgage as the loan security.

However, before getting a chattel mortgage, ensure you get conversant with the terms and conditions. The best thing is to seek expert advice from companies who have helped people get chattel mortgages using car allowances.

4. Learn about tax deductions

Many people think getting car allowances helps them evade or save on taxes. However, this is not the case, as a car allowance is not tax-free. It is actually taxed as any other form of income because you must detail your full car allowance amount when filing your tax returns.

5. Maximize your tax-deductibles

Since car allowance is considered taxable income, you can maximize it by maximizing your vehicle expenses. This will reduce the amount that must be deducted from your car allowance. You can claim the payments you use during work errands against your income to reduce the tax you pay. However, this entirely depends on how much you receive and how you use your car. You can calculate your tax deductibles using the log book and the cents per kilometer method.

The logbook method requires you to claim expenses for work purposes such as fuel, insurance, and servicing. You must keep a record of your logbook to claim these expenses. However, you cannot claim costs used when driving to and from work as that is treated as a private expense. The cents per kilometer method enables you to claim a maximum of 5000 kilometers per annum. It would be best if you accounted for the kilometers you are claiming.

6. Keep accurate and detailed logbook records

As mentioned above, your logbook records determine the amount you claim as work-related expenses. If you want to maximize your allowance, your logbook records should be accurate and current. Your logbook should give actual figures and descriptions of any business-related expenditure. Without an accurate one, you might claim nothing from your car allowance.

7. Primarily use the car for business

Put in mind that your car allowance only covers work-related expenses. Any other form of expense is considered private, and hence no reimbursement is made. You can consider using your car for exclusive business use to maximize your funding.

Some scenarios listed as business use of a car include; driving from your primary office to a second job, driving from home to a temporary workstation, and driving from your place of work to other locations related to the work. You can visit the IRS website to get more information on these considerations.

Bottom Line

Car expenses tend to overwhelm most people. Using alternative financing methods such as taking a car allowance is essential. However, before signing up for a car allowance, ensure you are conversant with your company's car allowance policy. Ensure that it outlines the company's values, eligibility criteria, mileage allowance, and contract terms, such as termination.

It is also vital for you to consult financial experts if you feel you need more time to get a car allowance. Once you get considered for a car allowance, be wise with it and ensure it serves all your expenses fully without digging deeper into your pockets.