Car allowances have always been problematic. If they are ‘wages/salary’ you do not need to pay them during any part of maternity leave, but if they are ‘benefits’ then you must continue to pay them during OML and, once the law has changed, AML as well. The problem is that it is often unclear which they are.
Car allowances usually appear separately on wage slips and are not pensionable. Employees often have the choice between a company car and a car allowance. These factors suggest that a car allowance should be treated – just like a company car - as a benefit rather than as part of salary.
However, our advice is to treat car allowances as wages or salary, at least until such time as we have some case-law clarifying the position. This means that you would not pay the allowance during any part of maternity leave, even once the law has changed. In our view, there are good arguments for this being the correct approach.
First, where an employee qualifies for SMP, 90% of the car allowance will be paid as part of her SMP for the first six weeks. This is because this first part of SMP is paid at the rate of 90% of the employee’s ‘normal earnings’ and a car allowance would count as normal earnings for this purpose. Maintaining the car allowance as a separate benefit would therefore lead to a degree of double-payment for the first six weeks.
In addition, car allowances tend to be regarded as uplifts on salary and they attract NICs, both of which suggest that they should be seen as wages not benefits.
Of course, if you have historically maintained car allowances throughout maternity leave then you may be contractually unable to draw back from that position (see below).
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