What pays off more – increase in salary or benefit in form of a company car?

Are you hesitating what to choose? In our article and accompanying video, we look at this topic from the perspective of both the employee and the employer.

Mrs. Kyselova, you are a tax consultant of Grant Thornton: what pays off more, increase in salary or a company car?

My first response has nothing to do with taxation. Many leading employees are more pleased with a company car than a salary increase, when they can use the car for private purposes. In our society, car is still a sign of matter of social standing. It improves your image, so a benefit in form of a car is always pleasant and it is motivating as well. Not to mention it has advantages for the employer too.

Yes, I understand that, but does it pay off?

It most definitely pays off, at least for the employee. Statistics say that monthly costs for a middle-class car including maintenance, repairs, insurance and tolls amount in Slovakia to a bit more than 400 EUR.

In comparison to that, when it comes to company cars, everything is paid by the company, also the acquisition price and running costs.

The employer taxes the benefit of using the car for private purposes. Nevertheless, Slovak tax legislation is quite generous in this aspect and defines this benefit as 1% of the car acquisition price including VAT and this amount decreases yearly by 12,5%, as the car ages.

What does it mean precisely? Can you give as an example?

On the average, by a middle-class car for 18 000 EUR, the employer spends on taxes and levies 40 EUR in the first 5 years. A company car costs the employee monthly approximately 360 EUR less than a private car. Of course, we are talking about a common usage and wear.

That sounds convincing, but does it pay off to the employer as well?

I think so. Here is a short explanation. Let us take as an example the previously mentioned middle-class car with the price tag 18 000 EUR. If you compare the annual remuneration in kind for the private use of the car by the employee with an equivalent salary increase of 2160 EUR per year (180 EUR monthly), you will learn:

For the first 8 years, which is equivalent to the average life of a car, the employer's social security contributions amount to a total of EUR 6083, while private use of the car, for which the employer also has to pay social security contributions, costs him EUR 3421 over the same period.

In other words, the employer saves in the same period on social contributions EUR 2 662. However, this calculation does not take into account that the employer must bear all the costs of the car.

What does that mean? When does it make sense for the employer to offer a company car to the employees?

My conclusion is that a company car makes sense if the car increases the mobility of workers or brings advantages for work, but we not talking about sales people who cannot work without a car. It is certain that the private use of a car is for employees and employers more advantageous for tax purposes than a salary increase in the same amount. This fact should be taken into consideration by the company car pool management.

If you are interested in this theme and think about introducing this benefit in your company, we can analyze, how much would you save on taxes and contributions.

Watch our video with English subtitles: