Company Car vs Car Allowance: Which is Better for You?

Summary

• A company car offers hassle-free motoring with predictable costs but is subject to Benefit-in-Kind (BiK) tax, which is very low for electric vehicles.
• A car allowance provides total freedom of choice and vehicle ownership, but the cash is taxed as regular income, and you bear all running costs and depreciation.
• The best option depends on your business mileage, desire for a new car, and whether you're considering an EV, which makes company cars highly tax-efficient.

So, you've landed a new job or a promotion, and it comes with a fantastic perk: a set of wheels. But then comes the choice that can feel like a trick question: do you take the company car or opt for the cash allowance?

It seems simple on the surface. One is a car, the other is money. But dive a little deeper, and you'll find a rabbit hole of tax implications, hidden costs, and personal preferences that can make a huge difference to your bank balance and your peace of mind.

Don't worry. Let's grab a coffee, sit down, and unpack this. By the end of this, you'll know exactly which option is right for you.

What's the Deal with a Company Car?

A company car is exactly what it sounds like. It’s a vehicle your employer owns or leases, and they give you the keys. You use it for business trips, and usually, for your personal driving too – the school run, weekend getaways, the lot.

The big appeal? Your company handles almost all the hassle. They sort out the insurance, road tax, servicing, and MOT. If it breaks down, it's their problem, not yours. It’s the closest thing to all-inclusive motoring you can get.

The Good Stuff (Pros of a Company Car)

• Hassle-Free Driving: Forget unexpected repair bills that ruin your month. Forget shopping around for the best insurance deal. It’s all taken care of. This is a massive weight off your shoulders.
• A New Car Every Few Years: Most companies replace their fleet every three or four years. This means you’re always driving a modern, reliable, and safe car with all the latest tech.
• Predictable Costs: You know exactly what it's going to cost you each month. There are no nasty surprises when a big service is due or the tyres need replacing.

The Not-So-Good Stuff (Cons of a Company Car)

• Limited Choice: You’ll likely have to choose from a pre-approved list. If you've got your heart set on a bright yellow sports car, but the list is full of sensible grey saloons, you’re out of luck.
• The Tax Man Cometh (Benefit-in-Kind Tax): This is the big one. Because you're getting a valuable perk that you can use in your personal life (including your commute), HMRC wants its cut. This is called Benefit-in-Kind (BiK) tax, and it's where things get a bit complicated.

A Simple Guide to Benefit-in-Kind (BiK) Tax

Okay, let's break down BiK tax without making it sound like an accounting lecture.

Think of it like this: HMRC sees the car as extra, non-cash income. To work out how much tax you owe, they look at three things:

1. The Car's P11D Value: This is basically the car's official list price, including VAT and any optional extras. It’s not the price your company paid, but the recommended retail price. The more expensive the car, the higher the P11D value.
2. Its CO2 Emissions: This is the game-changer. The car's official CO2 emissions figure determines its BiK percentage rate. A gas-guzzling SUV might have a rate of 37%, while a fully electric car has a rate of just 3% (for the 2025/26 tax year). The greener the car, the less tax you pay.
3. Your Income Tax Bracket: The final figure is multiplied by your personal income tax rate (20%, 40%, or 45%).

Quick Example:
Let's say you're a 20% taxpayer offered a petrol car with a P11D value of £30,000. Its emissions put it in a 25% BiK band.

• Taxable value = £30,000 x 25% = £7,500
• Annual tax you pay = £7,500 x 20% = £1,500 (or £125 per month)

Now, imagine an electric car with a P11D of £40,000 and a 3% BiK band.

• Taxable value = £40,000 x 3% = £1,200
• Annual tax you pay = £1,200 x 20% = £240 (or just £20 per month!)

See the difference? The EV costs £10,000 more, but the tax is a fraction of the cost. More on that later.

A quick side note on fuel: if your employer pays for all your private fuel, you'll be hit with an extra, often very high, Fuel Benefit Tax. For most people, this is a terrible deal unless you have incredibly high personal mileage.

What About Taking the Cash Allowance?

A car allowance is an alternative where your employer adds a fixed amount of cash to your salary each month. The idea is that you use this money to fund your own vehicle for business use.

You take this cash and sort everything yourself: buying or leasing a car, insurance, tax, maintenance – everything.

The Good Stuff (Pros of a Car Allowance)

• Total Freedom: This is the biggest draw. You can buy any car you want, new or used. Want that bright yellow sports car? Go for it. Already have a car you love? Keep it and use the cash for running costs. It’s your money.
• You Own the Asset: If you buy the car, it's yours. When you leave the job, you take it with you. You're building equity in an asset, not just renting a perk.
• Potential to "Beat the System": If your allowance is £500 a month but you choose to run an older, reliable car that only costs you £200 a month in finance and running costs, you pocket the difference.

The Not-So-Good Stuff (Cons of a Car Allowance)

• It's Just More Salary: Here’s the catch. That £500 monthly allowance isn't £500 in your pocket. It's added to your payslip before tax, meaning it gets hit by Income Tax and National Insurance just like the rest of your earnings. For a higher-rate taxpayer, you could lose 40% or more of it straight away.
• You're Responsible for Everything: When the boiler goes in your house, that's your problem. It's the same with the car. A blown gearbox or a failed MOT is your financial headache to solve, and the allowance might not stretch to cover it. You'll need to check your own car's road tax and handle all the admin.
• Depreciation: The silent killer of car ownership. The moment you drive your new car off the forecourt, it starts losing value. With a cash allowance, that financial loss is all yours. For more on this, see our guide to car depreciation.

Company Car vs Allowance: The Head-to-Head

Let's put it all in a simple table to make it clearer.

So, Which One is Actually Better for You?

There's no single answer, but we can get you pretty close by looking at your circumstances.

A company car is probably your best bet if:

• You drive a lot for work. High business mileage racks up fuel, servicing, and tyre costs. With a company car, your employer foots that bill.
• You hate financial surprises. The fixed monthly cost of BiK tax is predictable. A sudden £1,000 repair bill on your own car is not.
• You want a brand-new car every few years without the hassle of selling the old one.
• You want an electric vehicle (EV). This is the most important point right now. The tax savings on an EV company car are so massive they can make it a financial no-brainer. More companies are offering them via "Salary Sacrifice" schemes, which provides even greater savings.

A car allowance is likely the winner if:

• You don’t drive much for business. If your work mileage is low, you can run a cheaper car and pocket a larger chunk of the allowance.
• You already own a car you're happy with. You can just use the allowance to cover its running costs.
• You're a savvy car owner. If you're good at finding deals and happy to drive a well-maintained used car, your costs could be significantly lower than the post-tax allowance.
• You crave freedom of choice. If driving a specific car is important to your lifestyle, the allowance gives you that freedom.

A Crucial Point People Miss: Mileage Allowance

Here’s a great tip: even if you take the car allowance, you can often still claim for your business mileage. Under HMRC's Approved Mileage Allowance Payments (AMAP) scheme, your employer can pay you up to 45p per mile for the first 10,000 business miles (and 25p after that), tax-free.

This is designed to cover fuel and wear-and-tear. It’s a separate reimbursement from your taxable car allowance, and it can make a huge difference to your overall costs.

The Bottom Line: Do the Maths

The old debate of company car vs car allowance has been completely transformed by electric vehicles. A few years ago, rising BiK tax meant cash allowances were becoming the default choice. Now, the huge tax incentives for EVs have swung the pendulum firmly back towards company cars for many people. For more information, check out our small business fleet management guide.

The choice boils down to a simple trade-off:

• Company Car: A convenient, predictable, all-inclusive package.
• Car Allowance: A flexible, freedom-focused cash option.

There is no substitute for running the numbers for your specific situation.

1. Ask your employer for the exact monthly car allowance figure. Calculate what you'll receive after tax and NI.
2. Get the list of available company cars. For each one you're interested in, find its P11D value and CO2 emissions.
3. Use an online BiK calculator to work out your monthly company car tax.
4. Compare your after-tax allowance with the monthly BiK tax.

Once you have those two numbers side-by-side, and factor in the hassle and responsibility of running your own car, the right choice for you will become crystal clear.

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