Company Car vs Car Allowance: Which Is Better?

Take the company car if it's fully electric. At a 4% Benefit in Kind rate for the 2026/27 tax year, the tax on an EV company car is so low that a cash allowance rarely beats it. Take the allowance if the choice list is petrol or diesel, if you cover heavy business mileage, or if you already own a car you like.

Should You Take the Company Car or the Car Allowance?

Take the company car if it's fully electric - a 4% BiK rate for the 2026/27 tax year makes it very hard to beat. Take the cash allowance if the choice list is petrol or diesel, if you drive high business mileage, or if you already own a car outright and are happy with it.

That's the honest short version, and for most people it's the whole answer. But the reason it holds is worth understanding, because employers structure these schemes very differently and a bad company car list can turn a generous-looking benefit into an expensive one.

The mechanics are simple enough. A cash allowance is salary with a label on it, so it's taxed like salary. A company car is taxed on the car's list price and its emissions, not on what your employer actually paid for it or what the lease costs them. Those are two completely different tax systems, and the gap between them is exactly why the answer flips depending on which cars are on offer.

One more thing before the detail: you're not really choosing between "free car" and "free money". You're choosing between two costs. With the car, you pay BiK tax. With the allowance, you receive cash and then pay for a car out of it - lease or finance, insurance, servicing, tyres, road tax, the lot. Compare those two net positions and the decision usually makes itself.

How Is a Car Allowance Taxed in 2026/27?

A car allowance is treated by HMRC as ordinary earnings. It goes through payroll with your salary and is subject to income tax at your marginal rate and employee National Insurance. There's no special relief and no allowance-specific tax break - what lands in your account is materially less than the headline figure.

For the 2026/27 tax year, a basic-rate taxpayer pays 20% income tax and 8% employee National Insurance on earnings between £12,570 and £50,270. Above the £50,270 upper earnings limit, employee NI drops to 2% while income tax rises to 40%.

So on a £6,000 a year allowance (£500 a month):

• Basic-rate taxpayer: £1,200 income tax + £480 NI = £4,320 net, or £360 a month.
• Higher-rate taxpayer (already earning above £50,270): £2,400 income tax + £120 NI = £3,480 net, or £290 a month.

That net figure is your real budget. And here's a detail worth checking with your payroll team: because the allowance is earnings, it usually counts towards pensionable pay, overtime calculations and mortgage affordability assessments. A company car doesn't. For anyone about to apply for a mortgage, that's not a trivial difference.

How Is a Company Car Taxed?

A company car available for private use is a Benefit in Kind (BiK) - a non-cash perk that HMRC taxes as if it were income. The annual taxable benefit is the car's P11D value (list price including options, delivery and VAT) multiplied by an appropriate percentage set by CO2 emissions. You then pay income tax on that benefit at your marginal rate.

The formula, every time:

For the 2026/27 tax year, under HMRC's published company car tax rates, fully electric cars sit at 4% (rising to 5% in 2027/28). Plug-in hybrids are banded by electric-only range and CO2. Petrol and diesel cars run from roughly 15% up to a maximum of 37%, with most mainstream models landing somewhere in the mid-twenties to mid-thirties. Non-RDE2 compliant diesels carry a 4% supplement on top, capped at that same 37% ceiling.

Two things catch people out. First, BiK is based on list price, not the discounted price anyone actually paid - a £45,000 list price car taxes you as a £45,000 car even if the fleet bought it far cheaper. Second, options fitted at build add to the P11D value, so a few thousand pounds of extras quietly raise your tax bill for the whole contract. Our guide to Benefit-in-Kind tax goes through the bands and calculations in more depth.

Company Car vs Car Allowance: Side-by-Side

The company car wins on simplicity, risk and - if it's electric - tax. The allowance wins on freedom, on mileage claims, and on any petrol or diesel car with a mid-to-high BiK percentage. This table sets out where each one lands.

Worked Example: Which Is Worth More After Tax?

Compare the true annual cost of each option, not the headline numbers. For the company car, that cost is the BiK tax. For the allowance, it's what you spend running your own car minus the net cash you receive. Whichever number is smaller is the better deal for you.

All figures below are illustrative round numbers for the 2026/27 tax year, chosen to show the mechanics. They aren't quotes and they aren't anyone's actual terms.

The setup

A higher-rate taxpayer earning above £50,270 is offered either a £6,000 a year car allowance or a car from the company list. Net allowance after 40% tax and 2% NI: £3,480 a year.

Running their own equivalent car, illustratively: personal lease at £400 a month including VAT (£4,800), insurance £600, and servicing, tyres and vehicle excise duty around £595. Total £5,995 a year. Net cost after the allowance: £5,995 − £3,480 = £2,515 a year.

Option A: petrol company car, £35,000 P11D, 29% BiK

£35,000 × 29% = £10,150 taxable benefit. At 40%, that's £4,060 a year (about £338 a month) straight off your payslip.

Against the £2,515 net cost of the allowance route, the petrol company car is roughly £1,545 a year worse. Take the cash.

Option B: electric company car, £40,000 P11D, 4% BiK

£40,000 × 4% = £1,600 taxable benefit. At 40%, that's £640 a year - about £53 a month for a £40,000 car with servicing, tyres and road tax handled for you.

Against £2,515, the EV company car is roughly £1,875 a year better. Take the car. It isn't close.

The same pattern holds at basic rate, just with smaller numbers. Net allowance £4,320, so the allowance route costs £1,675 net; the petrol car at 20% costs £2,030 in BiK; the EV costs £320. Same conclusion both times - the fuel type, not the tax band, is what decides it.

Does Business Mileage Change the Answer?

Yes, and it's the single biggest reason to take the cash. If you use your own car for business journeys, HMRC's Approved Mileage Allowance Payments (AMAP) let your employer reimburse you tax-free at 55p per mile for the first 10,000 business miles in 2026/27, then 25p per mile thereafter. Company car drivers get nothing like it.

According to HMRC, the AMAP rate for cars and vans rose to 55p for the first 10,000 business miles with effect from 6 April 2026 - the first change since 2011. The rate above 10,000 miles remained at 25p. AMAP is designed to cover fuel, wear, insurance and depreciation in one figure, which is why you can't claim those separately on top.

Drive 10,000 business miles on a cash allowance and that's £5,500 of tax-free reimbursement, on top of the allowance itself. Drive 15,000 and it's £6,750. That money doesn't exist on the company car side, where you're reimbursed only for fuel, at HMRC's Advisory Fuel Rates - lower, set by engine size and fuel type, and reviewed quarterly.

So the rule of thumb we'd give: if you cover more than around 8,000-10,000 business miles a year and the choice list is petrol or diesel, the allowance is almost certainly the better deal. If your employer reimburses below the approved rate, you can claim the shortfall as Mileage Allowance Relief through Self Assessment or form P87.

Worth checking before you assume: some employers pay a car allowance and a reduced pence-per-mile rate. Others pay AMAP in full. The difference between 25p and 55p a mile over 12,000 miles is well over £3,000 a year, so read the policy rather than the offer letter summary.

Taking the Allowance and Leasing Privately

If you take the cash, a personal lease is usually the cleanest way to spend it. You get a fixed monthly cost, a new car with a manufacturer warranty, no depreciation risk, and none of the hassle of selling at the end. It also keeps your monthly outgoing predictable, which matters when the allowance itself is fixed.

Personal Contract Hire (PCH) - a personal lease, where you pay a fixed monthly rental for an agreed term and mileage, then hand the car back - is the standard route. Prices are quoted including VAT. Business Contract Hire (BCH) is the equivalent for a limited company or partnership and is quoted excluding VAT, with the business usually able to reclaim 50% of the VAT on the rentals for a car. If you're unsure which applies to you, our personal vs business lease comparison sets out the eligibility rules, and the VAT reclaim guide covers the 50% restriction in detail.

Three practical points from arranging thousands of these:

On why a lease can undercut buying: the rental reflects the gap between what the vehicle costs to acquire and what it's forecast to be worth at the end of the term, plus interest charges. Because we commit to manufacturers in volume, the acquisition side comes down while the forecast end value is set against the vehicle itself - which narrows that gap. The business leasing explainer covers how contract hire works end to end, and it's worth comparing a few deals on the same term and mileage before you commit.

The Non-Tax Factors People Forget

Tax decides most of these choices, but not all of them. Risk, flexibility and what happens when your circumstances change all carry real financial weight - and they're the things people wish they'd thought about eighteen months in, rather than on day one.

What happens if you leave the job?

A company car goes back with the job. A personal lease funded by an allowance does not - you signed it, and you keep paying it whether or not the allowance continues. Early termination is possible but comes at a cost. If there's any chance of redundancy or a move, that asymmetry matters more than a few pounds of tax.

Who carries the end-of-contract risk?

With a company car, condition charges are the employer's issue. With a personal lease, they're yours. Under BVRLA fair wear and tear standards, normal deterioration for the car's age and mileage is acceptable; damage from impact or neglect isn't. It's an industry-wide standard, and reading it a few months before handback rather than a week before saves people money regularly.

Does the allowance actually cover a decent car?

Blunt point: plenty of allowances are set at levels that made sense years ago. If the net figure is £290 a month and the role expects you to turn up in something presentable, you may be topping it up from your own salary. Do that sum before you decide - the allowance is only generous if it's actually generous.

Frequently Asked Questions

Written by the leasing team at First Vehicle Leasing, an FCA-authorised and regulated broker and BVRLA member with over 25 years of experience arranging personal and business vehicle leases across the UK. We're not tax advisers - for advice on your own tax position, speak to your accountant or HMRC.