Car allowances in the UK

PUBLISHED JUL 28, 2020 • 2 MIN READ

In the United Kingdom, your employer may choose to pay you a car allowance which is considered a cash benefit. Cash benefits are usually taxed, and we’ll get into that a bit further down. A car allowance is commonly provided to an employee as an alternative to a company car scheme. The amount provided for your car allowance is stated in the employment contract and is normally paid every month with your salary, although some employers choose to pay annually.

Regardless of the car you drive - as long as it’s not a company car - your employer can choose to pay a car allowance as a company benefit. It does not matter whether you buy, already own or lease the vehicle, the allowance is the same. A car allowance does have some added benefit in the sense that it gives you the freedom to choose the car instead of having to drive the company provided one.

You are not required to spend the full allowance on a vehicle. If you drive your private car for business, you are of course responsible for any maintenance, repairs, insurance, and MOTs of the vehicle. You can spend some of the allowance for vehicle maintenance and use the rest for your own private expenses.

Are car allowances taxable?

Your car allowance is paid out with your salary and it is taxed at the same rate as your monthly income.

Although a car allowance is generally a great benefit, one thing to consider is how much tax you will be paying if you do receive it, as it can push you into a higher tax bracket.

Can I receive mileage allowance while receiving a car allowance?

Your employer paying you a car allowance does not make you ineligible to receive Mileage Allowance Payments (MAPs). Although you are responsible for any vehicle expenses, as listed above, your business mileage can be reimbursed through MAPs and paid out by your employer monthly.

The MAP is based on the actual business miles you have driven and is usually in line with the advisory rate by HMRC which covers costs such as:

  • Fuel
  • Servicing and repairs
  • Maintenance
  • Depreciation
  • Insurance and road tax

Here’s an overview of HMRC’s current advisory mileage allowance rates.

 

If your employer reimburses you at a lower mileage rate than the HMRC advisory rate, or does not reimburse your mileage, you will be able to claim Mileage Allowance Relief (MAR). Here’s more on how to claim MAR.

 

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This material has been prepared for general informational purposes only and is correct at the time of publishing. It should not be taken as professional advice from Driversnote. We recommend seeking independent legal, taxation, or financial advice from a professional to check how this information relates to your own circumstances.