Car Allowances and the National Living Wage: What Employers Need to Know
As an employer, navigating the complexities of remuneration and ensuring compliance with National Living Wage (NLW) legislation is paramount.
A common question that arises is whether car allowances can be factored into an employee's pay when calculating the NLW.
Here’s what you need to keep in mind:
The General Rule: Car Allowances Typically Don't Count
The straightforward answer is that, in most circumstances, a car allowance cannot be counted towards an employee's pay for National Living Wage purposes.
The National Living Wage, which as of April 2025 stands at £12.21 per hour for workers aged 21 and over, is calculated based on an employee's gross pay for their basic hours worked.
Government guidance and employment resources are clear that most benefits in kind, including the provision of a company car or a cash car allowance, are excluded from this calculation. While a car allowance is a cash benefit and therefore subject to income tax and National Insurance contributions, it's treated as separate from an employee's core salary when it comes to meeting NLW obligations.
Why is this the case?
The principle behind the NLW is to ensure a minimum level of basic pay for work performed. Allowances, like a car allowance, are often provided for specific purposes or to cover potential expenses related to the job (like providing a car for business purposes) rather than being direct payment for the work itself.
A Specific Consideration for the Property Sector
For employers within the property sector, where roles often necessitate employees using their own vehicles for viewings, inspections, and client meetings, this distinction is particularly pertinent. To attract and retain top talent in a competitive market, it’s advisable to review how the use of a personal car is compensated. Simply ensuring basic pay meets the NLW might not be enough if significant personal vehicle use is a job requirement. Consider whether your car allowance or overall remuneration adequately reflects this expectation and positions your roles as attractive opportunities.
Is There Ever an Exception?
There's a nuanced point in official guidance regarding allowances that are "consolidated into standard pay." For an allowance to be considered part of NMW/NLW pay, it would need to be fully integrated into the employee's regular salary structure – for example, being included for pension calculations, overtime rates, and annual pay reviews, effectively losing its status as a separate allowance. This is not the typical way car allowances are structured. Therefore, relying on this as a general rule for including car allowances in NLW calculations would be misaligned with common practice and guidance.
A Note on Salary Sacrifice
It’s also critical to remember that if an employee enters into a salary sacrifice arrangement for a company car, their resulting gross pay (after the sacrifice) must still be at or above the National Living Wage for the hours they work. The sacrifice cannot legally take them below this threshold.
Key Takeaway for Employers
To ensure compliance, employers should always calculate the National Living Wage based on an employee's basic rate of pay, excluding benefits like car allowances. Focus on the core remuneration for the job role itself, and for roles requiring personal vehicle use, ensure any related allowances are fair and competitive.
Staying informed on these distinctions is crucial for fair and legal compensation practices. At Worth Recruiting, we understand the importance of getting these details right. If you have questions about structuring competitive and compliant remuneration packages, particularly within the property sector, we’re here to help.
Just call us on 01372 238300
Disclaimer: This blog post provides general information and should not be taken as legal advice. Employers should always refer to the latest government guidance or seek professional legal advice for specific situations.
