Company car vs car allowance: which is the better option?

Deciding between a car allowance or a company car is a nice headache to have. Often, that decision will be out of your hands as businesses tend to lean towards one option over the other for the sake of ease. But if you are offered the choice, there’s plenty to think about.

Go for a company car, and you’ll get access to a fully-catered-for vehicle, albeit one you don’t own and you’ll need to pay tax on. Opt for a cash allowance, and you’ll be on the hook for all running costs, but you’ll have much more freedom to do what you want with both the car you run and the money you receive.

Both routes have standout pros and cons. The right decision for you will be based on your priorities and requirements regarding frequency of use, ownership, personal responsibility, tax liability and more.

What’s the difference between a company car and a cash allowance?

A company car is a vehicle provided by a business to one of its employees to use for both business and personal travel. A car allowance (sometimes known as a cash allowance) is a cash stipend paid directly to an employee as part of their gross (pre-tax) salary, with the intention for it to be used to help support the costs of acquiring and running a vehicle.

The two differ widely in how they’re managed between employer and employee. A company car essentially acts as a fully catered car rental for the employee, while a car allowance offers the employee much more freedom – but with it, much more responsibility – in how they operate their vehicle.

How does a company car work?

What is a company car?

A company car is a vehicle provided to an employee by an employer for business and private use. The vehicle is paid for and maintained by the employer, with key costs like insurance, servicing and maintenance covered by the business.

Provision and use

If your employer offers a company car provision, they’ll offer it in one of two ways:

• User chooser: in a ‘user chooser’ agreement, the business will work out a suitable budget per vehicle and then offer you a choice of vehicles that fit that budget. You can then pick your preferred option, and the company will provide it.
• Job need: in a ‘job need’ scenario, the business will typically buy a fleet of a single model with the same specification. If you’re eligible for the company scheme, you’ll simply be given one of these vehicles to use.

Naturally, a company car is there to cover all your business travel, but generally speaking, you’ll be able to use the vehicle for personal use, too. There may be some limits on how you can use the car which your company policy will define. There are also some tax implications to consider – more on that below.

Maintenance and insurance

Regardless of how your company car is provided, all key running costs will be covered by your employer. Insurance, servicing, maintenance and road tax are all paid for. In many cases, fuel will be covered, too (again, this is subject to tax for personal use).

Tax implications

If you use your company car for personal travel, you’ll have to pay benefit-in-kind (BiK) tax. BiK is a tax on employees who receive benefits on top of their salary. When applied to a company car, it’s often dubbed ‘company car tax’. BiK on your company car is calculated based on:

• P11D value: this is the car’s list price, including all extras, delivery charges and VAT (excluding its first-year registration fee and road tax)
• CO2 emissions: the higher the vehicle’s CO2 emissions, the higher the BiK tax rate applied.
• Fuel type: both combustion engine types carry high BiK rates, but diesel vehicles carry an additional 4% surcharge from petrol models. Hybrid vehicles with lower emissions benefit from lower BiK brackets, while electric vehicles carry the lowest BiK rate because of zero tailpipe emissions.
• Income tax band: BiK value (calculated by multiplying your car’s P11D value by its BiK rate) is added to your taxable income. You’ll then pay tax on this amount according to your income tax bracket (20-45%).

Because the amount of BiK you pay largely depends on the CO2 emissions of the vehicle, it’s substantially cheaper to drive newer, lower-emission models – particularly hybrid and electric options.

If your employer pays for the vehicle’s fuel and you have personal use of the vehicle, you’ll also be taxed on that. This is calculated by using your vehicle’s BiK banding and your income tax rate, and applying them to a multiplier set by the government. Check the examples below for what that might look like.

Quick BiK and fuel tax example

Let’s look at an example of a basic rate taxpayer who gets a company car allowance with fuel paid from their employer, using the car for both business and personal use:

P11D value of car: £35,000

CO2 emissions: 110g/km

Fuel type: petrol

Employee tax bracket: 20% (basic rate)

Using this information, BiK can be calculated:

BiK rate (as per UK company car tax bands 2022-2028): 27%

BiK value (P11D value multiplied by BiK rate): £35,000 x 27% = £9,450

BiK tax payable (BiK value multiplied by employee tax bracket): £9,450 x 20% = £1,890

So, in this example, the employee would pay an additional £1,890 in BiK tax for the year.

As for the fuel benefit tax, this is calculated by taking the government’s current fuel benefit multiplier and multiplying it by the BiK rate, then multiplying that figure by the employee’s tax bracket:

Car fuel benefit multiplier for 2024/25: £27,800

First calculation (car benefit multiplier multiplied by BiK rate): £27,800 x 27% = £7,506

Second and final calculation (first calculation multiplied by employee tax bracket): £7,506 x 20% = £1,501.20

So, in this example, the employee would pay an additional £1,501.20 in fuel benefit tax for the year.

That makes the total tax cost for the company car with fuel £3,391.20 for the year.

Pros and cons of a company car

Here are the big positives and negatives to consider with a company car:

Pros of a company car

• The car’s upfront cost, plus insurance, maintenance, servicing, repairs and road tax, are all paid for by your employer.
• For the sake of safety, reliability and presentation, company cars are kept up to date, so you’ll be able to get behind the wheel of a new car every few years.
• You don’t need to worry about the bad bits of ownership like deprecation and resale worries.
• You don’t need to think about the logistics of financing or purchasing a vehicle that might otherwise be financially out of reach.
• As long as you pick the right car (typically a low- or zero-emission hybrid or EV), your BiK tax will be very affordable –  and much more so than financing or leasing the vehicle yourself.

Cons of a company car

• Even if you get a company car via a ‘user chooser’ arrangement, the choice of vehicle tends to be limited.
• You’ll pay more tax – BiK tax can potentially add thousands to your annual tax bill if you don’t go for a low-emission vehicle.
• The car isn’t yours, so there’s no equity to gain as there would be if you bought or financed a car using a car allowance. Likewise, if you change or lose your job, you’ll lose the car, too.
• You can’t build a no-claims bonus on your insurance while driving a company car.
• Depending on your company policy, there may be restrictions on how you can use the vehicle.
• Fuel benefit tax may not always be financially worthwhile. Take the example above; you’d need to use over £1,500 of fuel across the year to get your money’s worth on the tax you pay.

How does a car allowance work?

What is a car allowance?

A car (cash) allowance is a cash sum paid into an employee’s gross (pre-tax) monthly salary. This is intended as financial support for an employee to run a vehicle, but it’s up to the employee how they spend the allowance.

The cash amount offered will be more or less the equivalent of what the business would spend on a company car, but sometimes these are incentivised over company car packages because of the reduced cost, risk and administrative responsibility for the employer.

Provision and use

The cash allowance is given to you with the expectation that you’ll use it to fund a car. As for the type of car you get, how you get it and what you use it for, that’s pretty much up to you.

You also don’t have to use some or all of the money for a car. If you’ve already got a car, you can use the money to help keep it running or elsewhere entirely. You can also go out and get a car on a cheap deal that leaves some of your cash allowance spare to spend elsewhere.

Maintenance and insurance

You’re responsible for all running costs. Insurance, maintenance, servicing, road tax and fuel all need to be considered when you’re thinking about how to manage your allowance.

Tax implications

A car allowance is considered part of your salary and is therefore subject to standard tax and NI contributions.

However, you can reimburse your business mileage via the government’s Approved Mileage Allowance Payments (AMAPs) without any additional tax liability. Annual rates for AMAPs are:

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

Pros and cons of a car allowance

These are the big positives and negatives to consider with a car allowance:

Pros of a car allowance

• You can get the car you want. Some employers may have minimum specifications for the vehicle required for the job, but you’re basically free to sort whatever option you fancy.
• You also have freedom of choice when it comes to the deal you get the car on, whether that’s buying outright, leasing or a purchase finance option.
• You’ll receive higher take-home pay which, if you’ve already got a car that you run within your current finances, you can use elsewhere.
• If you choose to purchase a vehicle with your car allowance, you’ll be gaining equity in the vehicle and be able to profit from resale down the line.

Cons of a car allowance

• You’re responsible for all upfront and running costs.
• Because the cash allowance is subject to typical tax and NI contributions, higher-rate taxpayers may find themselves better off financially with a company car.
• If you’re using the car for more than 10,000 business miles a year, you’ll need to account for the AMAP rate drop from 45p to 25p per mile after the 10,000-mile mark, which could leave you out of pocket.

Car allowance vs company car: key differences

Costs for employers and employees

Cost responsibility is vastly different between the two options for employers and employees.

With a company car, the employer shoulders all the responsibility for the car’s purchase/lease cost and all key running costs, while the employee need only worry about BiK tax and, if they get a fuel allowance, fuel benefit tax.

Roles are essentially reversed for the cash allowance, with the employee taking on full responsibility for their vehicle costs while the employer only needs to make the fixed monthly payment.

Flexibility and control

While a company car comes with the benefit of minimal cost responsibility to the employee, that comes at the expense of flexibility. Even with a ‘user-chooser’ agreement, car choice tends to be limited, and the employer may set certain limits on how the vehicle can be used on a personal basis.

Car allowances come with almost complete flexibility because they’re simply an additional cash allowance added to your salary. It’s up to you how you spend that money – you can get whatever car you want on whatever deal you choose, or keep the money for other things (as long as you have a vehicle that’s up to the standards required by your role).

Tax efficiencies

Company cars can carry additional NI contributions for employers, but it’s the employee that faces the biggest tax burden in the form of BiK tax and, if applicable, fuel benefit tax.

A cash allowance is added to gross salary and is subject to standard tax and NI deductions. Thus, if you’re getting a car allowance, it’ll affect your taxable income. You’ll also be able to claim back tax on business mileage rates via government AMAPs, but you’ll need to be wary about the rate drop after 10,000 miles each year.

How to decide between a company car and a car allowance

Assess your needs – what suits you best?

A company car is probably better suited to you if…

• You drive a lot for business: if you rack up a lot of business miles, having everything from insurance to maintenance and fuel covered by your employer is a big plus. Company cars eliminate the risk of variable costs for the employee, which can fluctuate more with heavy use of the vehicle.
• You want to keep things simple: keeping all the vehicle’s costs under your employer’s roof makes things really easy. All you need to worry about is BiK and fuel benefit tax, meaning no unexpected costs, no matter what happens.
• You want a luxury vehicle or to upgrade regularly: businesses tend to keep their company car fleet up to date for the sake of safety, reliability and brand image, which means you’ll probably be behind the wheel of a new car every few years. Particularly if you work in a client-facing role, you’re also more likely to get a high-end vehicle at an affordable rate.
• You don’t want any upfront costs: they’re covered by your employer, so you don’t need to think about coming up with a lump sum payment when you first get the car.
• You’re in a higher tax bracket: because car allowances are part of your pre-tax salary, higher or additional rate taxpayers may find a company car makes more financial sense.

A car allowance is probably better suited to you if…

• You want more control and flexibility in car choice: with a cash allowance, it’s largely up to you what you do with the money. There’s (usually) no restriction on car choice or how it can be used, and you can choose how to purchase or finance the vehicle.
• You already have a car: if you’ve already got a car and have the running costs covered, your car allowance can be treated as a liquid pay boost that you can use elsewhere. The same goes for if you live close to work and don’t need to use your car much or at all.
• Want to manage your own costs: you’re in charge of all car costs, which you may feel is an advantage if you think you can manage them more efficiently and cost-effectively.
• Drive less for business: if you don’t drive a lot for business, some of the benefits of a company car, like a fuel allowance, can actually be a cost burden.
• You want to build some equity in a vehicle: you can use your car allowance to get a car either outright or via a purchase finance deal. Either way, you’ll have some equity in the vehicle which you can cash in on when you want to sell it.

Get some advice

Once you’re done with a guide like this that explains the two options in detail, you can seek out a company car vs car allowance calculator to work out the numbers behind both routes.

If you’re still not sure, a financial advisor, tax consultant or even a HR specialist at your workplace might be able to help you come to the right decision.

Company car or car allowance FAQs

What are the tax implications of receiving a car allowance?

A car allowance is simply a cash stipend added to your gross (pre-tax) salary every month, so you’ll pay more tax and NI as a result of your boosted salary.

Employees can also use the government’s Approved Mileage Allowance Payments (AMAPs) to get a tax reimbursement on their annual business mileage. You can claim 45p per mile back on the first 10,000 miles. After that mark, you’ll get 25p per mile.

Can I use a car allowance to buy any car I want?

Your employer may have some stipulations on what kind of car you’ll be expected to run, but generally speaking, you’ll be free to get whatever car you want, which is one of the biggest benefits of going for a cash allowance over a company car.

How do I avoid paying tax on a company car?

Most company cards are high-economy hybrids or electric options. This is because lower-emission vehicles fit into the lowest BiK tax brackets, which carry substantially lower BiK payments than equivalent petrol or diesel options.

So, if you want to pay less tax, go for a low- or zero-emission vehicle.

Do I need to tell HMRC if I have a company car?

HMRC will need to be informed if you have a company car, but it’s typically your employer’s responsibility to do this.

How much does having a company car add to your salary?

Having a company car doesn’t directly add to your salary, but it may well present a more affordable way of driving a vehicle than if you were to finance it yourself. A company car is a taxable benefit subject to BiK tax, so you’ll be paying more tax out of your monthly pay packet in exchange for running the vehicle.

What happens if I leave my job while still having a company car?

If you leave the company, you’ll lose your company car and all associated benefits. Usually, you’ll be expected to return it immediately, but sometimes you might get a grace period if your employer allows it. When you leave, your employer will report your departure to HMRC and your BiK tax will be adjusted and calculated accordingly, with the final tax amount listed on your P45.

In rare instances, you may be able to make an offer to buy the car, but this depends on company policy.

Find the right solution with Hippo

We’ve spent close to 20 years helping employers build their company car fleet, and employees find great deals on individual leases. Essentially, whatever you’re looking for, we can help you find the right solution.

Ready to get started? Take a look at our business leasing range right away, or check out our full leasing catalogue.

If you want to read more on leasing, try out our guides on how car leasing works and how business car leasing works.

If you’d like to talk to someone, don’t hesitate to give us a call.