What is car allowance?

A car allowance covers any work-related costs when an employee uses their vehicle for their job. A person may receive a car allowance after a promotion, so in this example, it's a reward for employee loyalty.

However, a car allowance is necessary in some instances, as employees would incur unfair additional costs, such as travelling salespeople or some mobile healthcare professionals.

Examples of car allowance expenses include fuel, some maintenance, and a lease. 

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How does car allowance work?

When an employee has a car allowance they receive a lump sum of money added to their salary to cover work-related driving expenses, such as fuel or even a lease. Car allowance is usually paid on a monthly basis and is included in their payslip.

Insurance policies

Company car:

  • Insurance is paid for and dealt with by the company.
  • Accidents and other claims are managed by the company, including courtesy cars.

Car allowance:

  • Employees are responsible for insurance coverage that includes business travel.
  • All accidents and claims need to be dealt with by the employee.
  • Employees incur replacement vehicle costs.

Maintenance responsibilities

Company car:

  • Maintenance, MOT, breakdown, tyre, glass, and road taxes are paid for and handled by the company or its fleet management service provider.
  • Service benefits such as online booking, collection and delivery, wash and vacuum, and courtesy vehicle are provided.

Car allowance:

  • Employees are liable for all maintenance costs.
  • Employees are responsible for the MOT.
  • Once in ownership of a car, employees need to purchase breakdown cover.
  • Direct ownership may incur replacement vehicle costs and inconvenience.

Is car allowance taxable?

Yes, because it's an employee benefit. The amount of tax an employee pays is determined by their income tax band. The basic rate is 20% and the higher rate is 40%.

For car allowance to be a meaningful benefit you must keep in mind how much money employees can access after tax has been deducted.

Car allowance vs a company car: a quick comparison

A company car or car allowance can form part of your employee benefits package.

Benefits of a company car

  • Possibility for branding cars, especially for salespeople

  • Great incentive to attract top talent

  • Control over the choice of vehicle

  • Easy to control costs

Cons of a company car

  • Responsible for repairs, servicing, and driving costs

  • Liability for vehicle insurance

  • Responsible for selling vehicle

  • Not always the most efficient for tax purposes

  • Requires a significant upfront investment

Benefits of a car allowance

  • Administration and maintenance costs are passed onto the driver
  • Can avoid company car tax and still offer a big benefit to employees

Cons of a car allowance

  • Some prospective employees, particularly in sales, may not want the added responsibility of choosing and maintaining a car. Consequently, this could reduce the talent pool wanting to work at your organisation.

Want to know everything about employee benefits? Read our helpful guide

Company car vs car allowance, what's the difference?

Male Driver Using Touchscreen In Company Car

Due to the increased cost of living, employees are focusing more on benefits and perks in addition to salary, so it's important to check that your offerings are still current. You can do this by reviewing your employee benefits provider. During this time, it's also a good idea to confirm if your car benefits are still meeting your employees' needs. For example, if your allowance covers PCP.

By allowing employees to select a new car with PCP, they are more likely to get the car at a competitive rate. PCPs also offer increased flexibility as the scheme only covers the vehicle's depreciation throughout the agreement rather than its full value. When the customer reaches the end of their agreement, they can either hand the keys back, buy the vehicle, or begin a new PCP.

Reassurance and insurance

Car insurance policy for a company car

Employers with a fleet of cars can offer their people a cheaper option when considering tax savings and salary sacrifice schemes compared with straight-up monetary repayments and any initial upfront costs.

Suppose a cash alternative is made readily available to employees. In that case, a new HMRC tax regulation will be triggered, meaning employees will be taxed on higher Benefits in Kind (BiK) on the cash allowance. There will also likely be implications for NI payments for the employer too.

Personalisation vs. unification 

Vehicles available via company car allowance

Another factor is branding. Image and operating cost decisions play a huge part in the selection process. This often restricts certain makes, models, and body types, such as convertibles, or, for environmental reasons, certain emission brackets and fuel types.

However, cash allowances depend on the employee directly sourcing their vehicle from a dealership or website, which can be time-consuming. To avoid such complications, management should be mindful of this when considering a cash allowance — especially in smaller teams. As the rates of BiK tax change every tax year, employers must be vigilant or risk reimbursement costs to their employees.

The basics of BiK and car allowance tax

Every year, three key factors are used to calculate how much tax an employee will have to pay towards their annual BiK tax.

  • Driver earnings
  • The cost of the car
  • The amount of CO2 it emits

For example, a person earning a high salary with an expensive high-emission car will pay more BiK tax.

With a unified fleet of cars, however, a company can easily calculate overall fuel costs and required mileage and dedicate resources accordingly.

Company car allowance tax vs a monthly salary

Cash allowances for company cars are typically added to the employee’s monthly salary, which means they're subject to normal income tax. Consequently, employees will need to calculate how their take-home pay is affected.

In the case of company-provided cars, the business takes care of the administration and maintenance. The opposite is true for car allowances, as the employee receives a sum of money to buy a car and maintain it themselves.

Company car vs car allowance: what you should consider

Many factors can influence whether an employee should receive a car allowance or a company car.

car sales old balance scales pounds sterling

Financial control

Company car:

  • Employees pay Benefit In Kind (BiK) on the company vehicle based on the value of the vehicle, CO2 emission level, and tax rate.
  • Monthly costs stay the same, so an employee can budget accordingly.

Car allowance:

  • Employees are free to spend the cash allowance in any way — not necessarily on a vehicle. For example, public transport may be more suitable in some instances.
  • Employees do not pay BIK on the company vehicle, but the gross cash allowance is subject to yearly tax reviews and N.I deduction.
  • Employees must consider their financial circumstances, such as cash allowance value, mileage, and tax rates.
  • Drivers are responsible for the purchase, finance, and running costs.


Company cars:

  • The car is chosen from an approved list and is owned by the company, not the employee.
  • When the employee leaves the company they return the car.
  • The acquisition and disposal of the car are the company's responsibility.

 Car allowance:

  • Employees may own the car or are responsible for paying a finance agreement.
  • If employment is terminated, former employees are responsible for buying and selling the car.

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Young worried employee has empty piggy money bank

Fuel and reimbursement policies

Company car:

  • The company covers all costs, apart from private fuel.
  • Business mileage needs to be logged and claimed.
  • If using a fuel card, employees need to keep mileage records.
  • The company may pay for all fuel consumption, including drivers’ private mileage.

Car allowance:

  • Reimbursements will need to cover depreciation, maintenance, tax, and insurance costs, in addition to fuel.
  • Some companies may choose to cover fuel on an actual cost basis via fuel cards.
  • If companies pay an employee a higher or lower reimbursement rate than the AMAP’s rate, they may be entitled to tax relief or may incur a tax liability. Employees may have to wait until the end of the tax year to reconcile their tax position and regain any lost earnings.

Duty of care

Company car:

  • The company ensures the car is roadworthy and safe.
  • The employee is responsible for the maintenance and roadworthiness of the vehicle.

Environmental considerations

Company car:

  • Some companies may offer incentives for cleaner vehicle choices.
  • They may provide access to alternative fuel vehicles, such as hybrid models.

Car allowance:

  • Employees may use cash to fund other travel methods, such as public transport.
  • Employees are free to choose any vehicle, so they may not choose the most environmentally-friendly option.

Choice of vehicle

Company car:

  • Employees are guaranteed a brand-new vehicle in line with the replacement policy.
  • Choice is restricted to vehicles on the company car list.
  • Can trade up or down
  • Extras policy may limit the options.

Car allowance:

  • Employees can choose any car they want, with their employer's permission if necessary.
  • Can change the vehicle at any time.

Find out how Perbox can help you deliver the best employee experience possible

Frequently asked questions about car allowance

How much car allowance should I get?

This is entirely up to your employer and their scheme. Some companies offer bigger allowances than others and there are many factors that influence this. The most obvious is expected business mileage, but other factors include employee seniority and regional repair costs.

How will I receive car allowance?

How is car allowance paid?

Should I take a company car or car allowance?

Is car allowance part of a salary?

How does a company car work?

How does company car allowance work?

What are the benefits of a company car?

What are the benefits of car allowance?

Steering your thoughts

Young employee inspecting car allowance documentation

Car allowance vs. company car? What is right for one company may not be for another.

For organisations whose staff have to drive as part of their jobs, a fleet of company cars can be more efficient, depending on the size of the organisation.

That said, employees may find a car allowance a more practical solution if they don't want a separate company car.

Regardless of the approach you decide to take, always research your options carefully.

Get your employee benefits strategy on point

We've put together this guide to give you the tools you need to plan, create and review your very own employee benefits strategy.

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