Car allowance for employees

Car allowance is an employee benefit that employers can provide to employees instead of company-owned cars or the car salary sacrifice scheme.
If you are an employer, go to car allowance vs company cars for employers.

How does car allowance work?

Car allowance is a monetary benefit paid to employees on top of their regular salary. It is usually paid monthly, but it can also be paid quarterly or even annually. It is meant to help employees purchase or lease a car or maintain the one they already own. Since the allowance is an employee benefit added on top of the regular salary, it is also a widely used method by employers to attract and retain employees.

Do you have to spend your car allowance on a car?

You are not required to spend the allowance on a car. Since the car allowance is a benefit, you don’t need to provide proof of how you spend it. So, do with the money as you wish—buy or lease a car, maintain your own, or spend it on other personal expenses.

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Is car allowance taxable?

Car allowance in the UK is paid out with regular income, and as such, it is taxed. Company car allowance tax is applied at the same rate as your income tax, but the allowance doesn't form a part of your salary for bonuses, pension and redundancy purposes. Although a car allowance is generally a great benefit, consider how much total income you will receive with the added allowance, as it can push you into a higher tax bracket. The allowance you receive after taxes may be significantly less than the value of a company car.

Do you pay NI on car allowance?

In short, yes - you pay National Insurance in addition to income tax on your car allowance.

What is a reasonable car allowance in the UK?

A reasonable company car allowance should cover the cost of leasing a car or the expenses associated with maintaining and operating one, including fuel, repairs and insurance. The type of car you may be expected to lease according to your job, and hence the car allowance you can receive, will vary according to job position. You can expect anything from £300 per month for field sales and lower managers all the way up to £1,000 per month for director positions.

Car allowance and Mileage Allowance Payments

If your employer provides a car allowance, you can still receive Mileage Allowance Payments (MAPs). Although you are responsible for any car expenses, as mentioned above, your business mileage can be reimbursed through MAPs and paid out by your employer monthly.

The MAP is based on the business miles you drive and is usually in line with HMRC's advisory rate (45p for the first 10,000 mi, 25p after that). You can use our HMRC mileage rates calculator to work out how much you will receive in mileage allowance payments based on your driving.

If you are paid a car allowance, your employer may provide a lower mileage rate or none at all. If so, you can claim Mileage Allowance Relief (MAR) from HMRC at tax time. See our dedicated guide on how to claim Mileage Allowance Relief.

Car allowance vs the car salary sacrifice scheme

Receiving a company car allowance allows you to choose the car you want to purchase, lease, or simply maintain your current car. If you buy or lease a car, you can keep it even if you leave the company. However, you will pay income tax and National Insurance on the car allowance and will have to maintain the car yourself. Generally, a car allowance will be advantageous if you already own a car or have low transportation costs.

Salary sacrifice schemes for cars let you choose a car from a leasing company your employer has a contract with, potentially restricting your options. However, the salary sacrifice will lower your payable tax since you sacrifice a part of your salary prior to taxation. The maintenance of the car will usually be handled by the leasing company. There is a Benefit-in-Kind tax payable, too. A drawback you should keep in mind is that you must return the car if you leave the company. Find an explanation of car salary sacrifice schemes in the UK.

Car allowance vs company cars

Car allowance gives you the freedom to choose the car you want to purchase or keep your current car. You are responsible for maintenance and any other expenses associated with owning or leasing the car. The car allowance is added to your salary and is taxed as such, so before you splurge on a car, you should check what is left of your car allowance after taxes.

Company cars, on the other hand, are provided by your employer. You don't have a say in the car you get, and you have to pay Benefit-in-kind (BiK) tax based on your personal use of the car. However, the employer shoulders all responsibility for expenses and maintenance of it, making life easier for you. Employers may provide you with a company car allowance over a company car to simplify the company's operations.

Comparison table of car allowance, car salary sacrifice, and company cars.

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