Company Car vs Car Allowance: Which Is Better in the UK?

Summary

• Company cars are taxed as a benefit in kind (BIK). The tax depends on the car's CO2 emissions and list price.
• Car allowances are added to your salary and taxed as income. You buy and run your own car.
• Electric company cars have very low BIK rates making them the most tax-efficient option right now.

Your employer offers you a choice: a company car or a cash allowance. Which should you pick?

The answer depends on your tax bracket, mileage, and what car you want. Let's break it down.

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How Company Cars Are Taxed

When your employer gives you a company car, HMRC treats it as a benefit in kind. You pay income tax on the "benefit" of having the car.

The tax amount depends on two things:

1. The car's list price (P11D value) — what it cost new, including extras.
2. The BIK percentage — based on the car's CO2 emissions.

Example

A petrol car with a list price of £30,000 and BIK rate of 28% gives a taxable benefit of £8,400. If you're a 20% taxpayer, you'd pay £1,680 per year in extra tax. A 40% taxpayer would pay £3,360.

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How a Car Allowance Works

A car allowance is a cash payment added to your salary. You then buy, insure, and run your own car.

Typical car allowances in the UK range from £3,000 to £10,000 per year.

The allowance is taxed as regular income. So you'll pay income tax and National Insurance on the full amount.

Example: A £5,000 car allowance for a 20% taxpayer means you keep about £3,500 after tax and NI. For a 40% taxpayer, you'd keep about £2,700.

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Quick Comparison

Factor	Company Car	Car Allowance
Tax basis	BIK on car value/emissions	Income tax on full amount
Insurance	Employer pays	You pay
Servicing	Employer pays	You pay
Car choice	From employer's list	Your choice
Depreciation risk	Employer's risk	Your risk
Flexibility	Limited	High

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Electric Company Cars: The Game Changer

Electric cars have very low BIK rates. The current rate is just 2% of the list price. This makes electric company cars incredibly tax-efficient.

A £40,000 electric car has a BIK value of just £800 per year. A 20% taxpayer pays only £160 per year in tax. Compare that to a similar petrol car where you'd pay £2,000+.

This is why electric company cars are booming in the UK. Read our electric car guides for more on going electric.

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Which Is Better for You?

Take the company car if:

• An electric or low-emission car suits you (very low BIK tax)
• You don't want the hassle of running your own car
• Your employer pays for insurance, servicing, and breakdown cover
• You're a higher-rate taxpayer (car allowance gets heavily taxed)

Take the car allowance if:

• You want to choose exactly which car you drive
• You already own a car you're happy with
• The company car options don't suit you
• You do low mileage (running costs are manageable)

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Business Mileage Claims

If you use your own car for business, you can claim mileage at HMRC's approved rates:

• First 10,000 miles: 45p per mile
• Over 10,000 miles: 25p per mile

This is tax-free. It covers fuel, wear and tear, and insurance costs for business journeys. Commuting doesn't count as business mileage.

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The right choice depends on your circumstances. Run the numbers for your situation. In most cases, an electric company car offers the best value right now. But if freedom and flexibility matter more to you, a car allowance gives you full control.

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