Car allowance tax in the UK
Car allowance in the UK is considered a cash benefit and your employer may choose to provide you with such. Car allowance tax is common in the UK, 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 paid out 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 as it gives you the freedom to choose the car you drive instead of having to drive one provided by the company.
It's crucial to know how much you'll spend based on the car you choose, whether you're in a standard business car scheme, have the choice of a cash allowance, or are part of an innovative scheme like salary sacrifice. Your car allowance could depend on those things.
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 a part of the allowance on vehicle maintenance and use the rest for your own private expenses.
Is company car allowance taxable in the UK?
Car allowance is an amount of money given to an employee to allow them to buy a vehicle, which they should then uphold.
As a company, you should include your allowance entitlement, as well as the staff member's responsibilities regarding their car, in your contract.
You should obtain this allowance as soon as you start working and choose an appropriate vehicle of your choice.
There is a tax on car allowance in the UK. 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.
How much is HMRC car allowance tax in the UK for 2021?
Your car allowance tax is applied at the same rate as your personal income tax. This means that if you are a higher-rate taxpayer, you will pay 40% tax on the allowance. The amount of money you receive after taxes may be significantly less than the value of a company car.
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:
- Servicing and repairs
- Insurance and road tax
Here’s an overview of HMRC’s current advisory mileage allowance rates.
If you are paid a car allowance, your employer may reimburse you at a lower mileage rate or not at all. If this is the case, you will be able to claim Mileage Allowance Relief (MAR). Here’s more on how to claim MAR.
FAQ about car allowance in the UK
1. What is a company car allowance?
In the United Kingdom, a company car allowance is considered a monetary benefit, and your employer may opt to supply you with one. As an alternative to a business car scheme, an employee may be given a car allowance. The amount of your automobile allowance is specified in your employment contract and is often paid monthly with your income, while some employers choose to pay annually.
2. How much car allowance should I get?
How much car allowance you get depends highly on your situation, amount of driving you do for business and the agreement you have made with your employer. Read the article above for an overview of how car allowance in the UK works. To fully understand you car allowance, you need to consult your employer or accountant.
3. How will I receive company car allowance?
The car allowance is usually included to the employee's monthly pay provided by the employer. Before accepting the allowance, find out how your company intends to provide it for you and what is required for you to do when you receive it.
4. What is the difference between mileage allowance and company car allowance?
A car allowance is a financial contribution towards the purchase of a vehicle. It's added to your pay, and it's taxed as usual. On the other hand, a mileage allowance is tax-free and aims to cover the costs of fuel and wear and tear for business journeys.
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.