Company Car Allowance In The UK

Car allowance in the UK is considered a cash benefit and your employer may choose to provide you with such. A car allowance is commonly provided to employees 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.

Your employer might still require you to keep a log book of the business mileage of your vehicle. With Driversnote you can share your vehicle log book with your employer, or the HMRC, at the touch of a button. Try the mile tracking app for free.

How does car allowance work?

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 benefits 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.

Car allowance tax

Since car allowance in the UK is considered a benefit, it is taxed. Car allowance tax is applied at the same rate as your personal income tax. Although a car allowance is generally a great benefit, one thing to consider is how much total income you will be receiving, as it can push you into a higher tax bracket. The amount of money you receive after taxes may be significantly less than the value of a company car.

Receiving a mileage allowance along with a company car allowance

If your employer provides you with a car allowance, you are still eligible to receive Mileage Allowance Payments (MAPs). Although you are responsible for any vehicle 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 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 2023 HMRC mileage allowance rates.

If you are paid a car allowance, your employer may provide a lower mileage rate or none at all. If this is the case, you will be able to claim Mileage Allowance Relief (MAR). Here’s more on how to claim Mileage Allowance Relief.

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