Is It Better to Have a Company Car or a Car Allowance?
- Jerelyn Aglibao
- Nov 21
- 5 min read
Choosing between a company car and a car allowance isn’t just about driving preference — it’s a financial decision. Which option is “better” depends heavily on your personal tax rate, how much you drive, and what type of car you pick. Let’s break down the pros, cons, and key tax implications under current UK rules.
Key Tax Considerations
Benefit-in-Kind (BiK) for Company Cars
If your employer provides a car for both business and private (including commuter) use, that’s considered a “benefit in kind,” and you pay tax on it.
The BiK rate depends on the car’s P11D value (list price + options, etc.) and its CO₂ emissions.
From 6 April 2025, the “appropriate percentage” (used for BiK calculation) is rising by 1 percentage point for many vehicles.
Even zero-emission cars (EVs) will see their rate go up, capped at 20% for now.
For 2025/26, a fully electric car has a relatively low BiK rate: for instance, as per one guide, 3% for EVs.
There are also employer costs: if you have a company car, the employer pays Class 1A National Insurance Contributions on the BiK.
Car Allowance
A car allowance is simply extra cash added to your salary, earmarked (implicitly) for car costs. But: it’s taxed like salary — so you pay income tax (and employee National Insurance) on it.
You have more freedom: you can choose the car you like, maintain it how you want, and drive as much or as little as you want.
But all running costs are on you: insurance, servicing, MOT, depreciation, repairs – none of that is covered by the employer.
Because the allowance forms part of your taxable income, the “net” or take-home gain depends heavily on your tax band.
Pros and Cons: Side-by-Side
Option | Pros | Cons |
Company Car | Potentially lower BiK tax if you pick a low-emission / electric car. Employer often covers maintenance, insurance, MOT, servicing. You don’t worry about depreciation. | You pay BiK, which can be expensive for high-emission cars. Less control: car model, usage might be limited. Employer also has costs (NI, if providing fuel, etc.). If you don’t use it for personal mileage, the benefit may be less valuable. |
Car Allowance | Flexibility: pick any car, own it, modify it, choose how long to keep it. You may “cash in” the allowance (if car costs are low) — effectively get a pay bump. You avoid BiK. | You bear all running costs (insurance, repair, tax, depreciation). Allowance is taxed as income (so less “net” benefit). For high-mileage drivers, costs might outweigh the allowance benefit. |
Example Scenarios
Here are a few illustrative examples to show how each option might pan out in practice.
Example 1: Low-emissions or Electric Car, Moderate Use
Sarah works for a company that offers her a fully electric company car. Let’s say the P11D value is £40,000.
The BiK rate for 2025/26 for a zero-emission car is low (e.g., 3%) under current rules.
So her “cash equivalent” benefit is £40,000 × 3% = £1,200 of benefit per year. If she’s in the 40% tax band, she pays £480 annually in income tax on that benefit.
Her employer also pays NIC (Class 1A) on that same benefit.
Since she doesn’t pay for maintenance, insurance, or depreciation, this could be very cost-effective.
Example 2: Petrol or Diesel Company Car, Higher Emissions
Josh is offered a petrol car with CO₂ emissions of, say, 130 g/km. According to current brackets, that might attract a higher BiK rate (e.g., up to ~31% for certain emissions).
If the P11D value is £30,000, the cash equivalent could be roughly £30,000 × 31% = £9,300 per year.
In the 40% tax band, Josh would pay £3,720 in income tax yearly, just for that benefit.
Given that, the total cost to him might outweigh the convenience, unless the employer covers a lot of the running costs and/or he doesn’t want to own a car personally.
Example 3: Car Allowance, Moderate to Low Driving
Rebecca gets a £5,000/year car allowance from her employer. That gets added to her salary and is taxed at her marginal rate (say 20%). So she actually “takes home” £4,000 (after tax).
She already owns a small, efficient second-hand car; she pays for insurance, MOT, servicing, but these are manageable. Over a year, her car costs (fuel + maintenance) come to £3,000.
Net, she pockets about £1,000 extra after accounting for her costs. That’s free cash she can save, invest, or spend as she pleases.
When One Option Might Be Clearly Better
Here are scenarios where one option tends to make more financial sense:
Company car is likely better if:
The employer offers low-emission or electric vehicles, because BiK tax is much lower for those.
You drive a lot for work and for personal use — you get more “use” out of the benefit.
You prefer not to worry about maintenance, insurance, depreciation — you want a hassle-free, “company-managed” car.
Car allowance may be better if:
You already own a car, or don’t need a new one.
You drive relatively little, so your running costs are low.
You want full control over your vehicle (model, age, modifications) and are okay managing insurance, servicing, and depreciation yourself.
You prefer additional cash in your salary for flexibility (savings, other investments, or spending).
Risks and Things to Watch
Tax Rate Changes: BiK rates are subject to government updates. For example, the “appropriate percentages” are increasing.
Fuel Benefit Multiplier: If your employer provides fuel, the tax on that “fuel benefit” can change.
Residual Value / Depreciation: If you take allowance and lease or buy, changes in car resale values matter — you bear that risk.
Insurance & Maintenance: With an allowance, all running costs are on you. Unexpected repairs can erode your “benefit.”
Employer Policies: Not all employers are equally generous. Some might limit the car list, age of allowed cars, or require particular models for company car schemes.
Conclusion
A short answer to which is better to have a Company Car or Car Allowance depends on your situation:
For most employees, especially in 2025, if you’re in a mid-to-high tax band and your employer offers a low-emission or electric car, the company car option can be very tax efficient.
But if your driving needs are modest or you value flexibility, a car allowance may be more attractive: you get the cash, and if you run a cheap, efficient car, you could come out ahead.
The best approach is to run the numbers: ask your employer for a simulated payslip under both scenarios (allowance vs company car) and calculate your total costs (tax + running costs).
It is always recommend to do a cost-benefit analysis tailored to your exact situation, rather than relying on general “which is better.”
