Company Car vs Car Allowance: Which Is Better?

Company car vs allowance at a glance

• Allowance is salary: income tax plus employee and employer NI.
• Company car is taxed on list price × benefit percentage.
• Electric: 4% in 2026/27, rising to 5% in 2027/28. Petrol and diesel: 17% to 37%.
• Business mileage on your own car: 55p for the first 10,000 miles.
• Free private fuel is taxed on £29,200 × the same percentage, and rarely worth it.

Table Of Contents

• The Fundamental Difference
• How a Car Allowance Is Taxed
• How a Company Car Is Taxed
• The Electric Car Effect
• How to Run the Comparison
• Worked Examples
• The Mileage Difference
• Free Fuel Is Usually a Trap
• What Employers Should Weigh
• Directors of Their Own Company
• Get Help Deciding

The Fundamental Difference

A car allowance is cash. It's salary by another name, taxed exactly like salary, and the car is yours: you buy it, insure it, maintain it and carry the depreciation. A company car is a benefit. The employer owns or leases it, usually covers running costs, and you're taxed on a percentage of its list price regardless of what it cost your employer.

That structural difference explains why the answer has flipped over the last decade. When benefit percentages were high across the board, taking cash and buying your own car was usually better. The introduction of very low rates for electric vehicles reversed that for anyone willing to drive one.

The comparison is genuinely close for mid-range petrol and diesel cars, and not close at all at either extreme.

How a Car Allowance Is Taxed

As ordinary salary. It goes through payroll, attracts income tax at your marginal rate and employee National Insurance, and the employer pays employer National Insurance on top. There is no special treatment of any kind.

For a higher rate taxpayer receiving a £6,000 allowance:

Allowance	£6,000
Income tax at 40%	−£2,400
Employee NI at 2%	−£120
Net in your pocket	£3,480

That £3,480 has to fund the car entirely: purchase or finance, insurance, servicing, tyres, VED, and the depreciation, which is usually the largest cost and the one people forget because it doesn’t arrive as a bill.

Two things often missed:

• It’s usually pensionable. Because it’s salary, a car allowance typically counts for pension contributions and auto-enrolment, raising both your contributions and the employer’s. Cash-positive for your pension, cash-negative for your take-home.
• It counts towards thresholds. It’s part of adjusted net income, so it can push you over £50,270, £60,000 for the High Income Child Benefit Charge, or £100,000 where the personal allowance tapers. A company car benefit counts too, but at 4% of list price rather than the full cash amount.

How a Company Car Is Taxed

The taxable benefit is the P11D list price × the appropriate percentage. You then pay income tax on that benefit at your marginal rate. Your employer pays Class 1A National Insurance on the same figure.

The P11D price is the manufacturer’s list price including VAT, delivery and any optional extras fitted. Critically, it’s before any discount your employer negotiated. A £50,000 car bought for £42,000 is still taxed on £50,000, which is why heavily discounted cars can be worse value than the purchase price suggests.

The appropriate percentage is set by CO2 emissions, and for plug-in hybrids by electric-only range as well:

Car type	2026/27 percentage
Fully electric	4%
Plug-in hybrid	Depends on emissions and electric range
Petrol and diesel	17% to 37%

Diesel cars not meeting the RDE2 standard carry a 4 percentage point supplement, capped at the 37% maximum.

The Electric Car Effect

At 4%, an electric company car is taxed on a fraction of its value. On a £45,000 EV the benefit is £1,800, costing a higher rate taxpayer £720 a year. The equivalent petrol car at 30% would produce a £13,500 benefit and a £5,400 tax bill, seven and a half times more.

The rate is scheduled to rise, but gently: 3% in 2025/26, 4% in 2026/27, 5% in 2027/28. Even at 5% the gap against petrol and diesel remains enormous.

Two further advantages stack on top:

• Salary sacrifice works for EVs. Electric cars were specifically excluded when the rules removed most salary sacrifice advantages, so you can give up gross salary for the car and be taxed only on the 4%. This is the cheapest route to a company car available to most employees.
• No fuel benefit issue. Electricity provided by an employer for charging a company car at the workplace isn’t a taxable fuel benefit, so the fuel trap below doesn’t apply.

For the employer there’s a capital allowances point too: a new and unused zero emission car qualifies for a 100% first year allowance, the one exception to cars being excluded from AIA and full expensing.

How to Run the Comparison

Six steps, and do it over three or four years rather than one:

1. Price the allowance. Deduct income tax at your marginal rate and 2% employee NI to get the net cash.
2. Price the car you’d actually buy with that cash: finance or purchase, insurance, servicing, tyres, VED, and realistic depreciation.
3. Find the benefit percentage for the company car on offer.
4. Calculate the benefit: P11D price × percentage, then × your marginal rate.
5. Add what the company car covers that you’d otherwise pay: insurance, maintenance, VED, breakdown cover.
6. Add business mileage on both sides at the relevant rate.

The single year comparison misleads in both directions. Benefit percentages rise on a published schedule, so a company car gets gradually more expensive. Depreciation is front-loaded, so a privately owned car is most expensive in year one and cheapest in year five.

Worked Examples

Higher rate taxpayer, £6,000 allowance vs a £45,000 electric company car:

	Car allowance	Electric company car
Taxable amount	£6,000 (salary)	£1,800 (4% of £45,000)
Income tax at 40%	£2,400	£720
Employee NI at 2%	£120	£0
Your annual tax	£2,520	£720
Net cash received	£3,480	£0
Running costs you bear	Everything	Usually little or none

The allowance leaves you £3,480 to fund a £45,000 car. It won’t. The company car costs £720 a year in tax and covers the running costs. For an electric car this isn’t close.

Same taxpayer, £45,000 petrol car at 30%:

	Car allowance	Petrol company car
Taxable amount	£6,000	£13,500 (30% of £45,000)
Income tax at 40%	£2,400	£5,400
Employee NI at 2%	£120	£0
Your annual tax	£2,520	£5,400
Net cash received	£3,480	£0

Now the allowance looks better: you’re £2,880 a year better off on tax and hold £3,480 of cash, against which you fund the car. Whether it actually wins depends on how cheaply you can run a car and how much depreciation you absorb, but the direction has reversed entirely.

The Mileage Difference

This is where an allowance claws back ground for high-mileage drivers.

On your own car (allowance), business mileage can be reimbursed tax free at the approved rates: 55p per mile for the first 10,000 business miles from 6 April 2026, then 25p. If your employer pays less, you can claim tax relief on the difference.

On a company car, approved rates don’t apply. The employer can reimburse fuel at HMRC’s advisory fuel rates, which are much lower because they cover fuel only, not the cost of the car.

For someone driving 15,000 business miles a year, the approved mileage payments are worth £6,750 tax free. That’s a substantial figure and it can outweigh the benefit in kind advantage even on an electric car. High business mileage pushes the answer towards the allowance; low mileage pushes it towards the company car.

Free Fuel Is Usually a Trap

Where an employer pays for private fuel, a separate benefit arises: £29,200 × the same appropriate percentage for 2026/27. It's a fixed figure regardless of how much fuel you actually use, so low private mileage means paying tax on fuel you never had.

On a car at 30%, the fuel benefit is £8,760, costing a higher rate taxpayer £3,504 a year in tax. To break even you’d need to be using around £3,500 of private fuel annually, which is a great deal of private driving.

For most employees, refusing free private fuel and paying for it personally is cheaper. The exception is genuinely very high private mileage, which is rarer than the number of people who accept free fuel would suggest.

Electricity for charging a company car at the workplace is not a taxable fuel benefit, so this doesn’t apply to EVs.

What Employers Should Weigh

The decision isn’t only the employee’s:

• Employer NI. A car allowance attracts employer National Insurance on the full amount. A company car attracts Class 1A on the benefit, which for an EV is a fraction of the figure.
• Corporation tax relief. Lease payments and running costs are deductible, subject to a restriction for higher emission cars. Purchases attract capital allowances, with 100% first year allowance for new zero emission cars.
• Pension cost. An allowance is usually pensionable, so it raises employer pension contributions too.
• Administration. Company cars mean P11D reporting or payrolling benefits, fleet management and insurance. Allowances are simpler but you carry grey fleet risk: you must still check that employees driving on business have valid licences, insurance and roadworthy vehicles.
• Recruitment. An EV salary sacrifice scheme is a genuinely attractive benefit at low net cost to the business.

Directors of Their Own Company

For an owner-managed company the same rules apply, but you’re on both sides of the decision, which changes how to think about it.

The electric company car is usually the clear winner. The company gets a 100% first year allowance on a new zero emission car, deducts running costs, and pays Class 1A on a 4% benefit. You pay income tax on that same small benefit. Compared with extracting cash as salary or dividends and buying a car personally, the gap is wide.

For petrol and diesel, it usually isn’t worth it. The benefit charge on a director’s car frequently exceeds the value of the tax relief the company gets, and taking the money out as dividends and buying privately is often cheaper. Our guides to salary vs dividends and leasing an electric car through a limited company cover the surrounding decisions.

Get Help Deciding

The comparison is arithmetic, but it has enough moving parts that people get it wrong in both directions: taking an allowance when an EV would have been far cheaper, or accepting a high-emission company car because it felt like a perk.

ARB Accountants runs this comparison for directors and employees, covering the tax on both sides, the mileage position, and the employer cost, over the realistic life of the arrangement rather than a single year.

Read next

• Leasing an electric car through a limited company: the director’s version of this decision
• AIA and full expensing: why cars are treated differently
• Payrolled benefits on your payslip: how the benefit shows up in your tax code
• Salary vs dividends: extracting cash to buy privately instead