A car allowance is a sum of money paid by an employer to an employee to help cover the cost of using their own vehicle for work purposes. Unlike a company car — which the employer owns and provides — a car allowance is paid directly into your salary and gives you the freedom to choose your own vehicle.
In the UK, car allowances are extremely common, particularly in sales, management, and field-based roles where driving is a regular part of the job. The average car allowance in the UK in 2025 falls between £400 and £600 per month, although senior executives and directors can receive significantly more — sometimes exceeding £1,000 per month.
The key benefit of a car allowance is flexibility: you choose the car, you own it, and when you leave the job, you keep it. The downside is that HMRC treats a car allowance as part of your salary, meaning it is subject to income tax and National Insurance contributions — so what appears generous on paper can be considerably reduced once deductions are applied.
HMRC treats a cash car allowance as additional employment income. This means it is added on top of your salary and taxed at your marginal rate through PAYE. National Insurance contributions also apply.
For the 2025/26 tax year:
| Tax Band | Gross Allowance (Monthly) | Tax + NI Lost | Net Take-Home |
|---|---|---|---|
| Basic Rate (20% + 8% NI) | £500 | £140 | £360 |
| Higher Rate (40% + 2% NI) | £500 | £210 | £290 |
| Additional Rate (45% + 2% NI) | £500 | £235 | £265 |
| Basic Rate (20% + 8% NI) | £600 | £168 | £432 |
| Higher Rate (40% + 2% NI) | £600 | £252 | £348 |
Note: Employer NI (13.8%) is also due on car allowances, which increases the total employment cost for your employer but does not reduce your take-home.
Even if you receive a car allowance, you may still be able to claim tax relief on business mileage through HMRC's Approved Mileage Allowance Payments (AMAP) scheme — provided your employer pays less than the approved rate.
If your employer pays, say, 15p per mile and the HMRC approved rate is 45p per mile, you can claim tax relief on the 30p per mile difference. For a basic rate taxpayer, this means 20% of 30p = 6p per mile tax saving.
You can claim via:
You must keep a mileage log showing the date, start and end location, purpose of journey, and number of miles for every business trip.
The decision between a car allowance and a company car depends on several factors: how many miles you drive, what sort of car you want, your tax rate, and whether your employer provides a good leasing deal.
| Factor | Car Allowance | Company Car |
|---|---|---|
| Ownership | You own the car | Employer owns/leases it |
| Tax treatment | Taxed as salary (PAYE) | Benefit in Kind (BIK) tax |
| Insurance | You pay (business cover needed) | Employer arranges |
| Servicing/tyres | Your responsibility | Usually employer's responsibility |
| Choice of vehicle | Total freedom | Employer's approved list |
| Electric vehicles | Same tax as petrol car allowance | Only 3% BIK rate — very efficient |
| High mileage drivers | Better — mileage claims | Fuel card may offset cost |
| Low mileage drivers | May cost more to run | Often more efficient |
| Leaving job | Keep your car | Return the car |
For a petrol car, the typical break-even point is around 8,000–12,000 business miles per year. Below this, a company car is often cheaper on a total cost basis. Above this, claiming the HMRC mileage rate on a car allowance typically beats the BIK tax on a company car.
If you intend to use an electric vehicle and are offered a choice between allowance and company car, the maths strongly favour the company car in 2025/26 due to the low 3% BIK rate.
However, if you already own an electric vehicle and your employer offers a cash allowance, there are still benefits:
Both employee and employer National Insurance applies to car allowances paid as cash:
This means for a basic rate taxpayer receiving a £500/month allowance, the total government take (income tax + employee NI) is approximately 28% — leaving just £360/month in the hand. If you are a higher rate taxpayer, the combined rate is 42%, leaving just £290/month.
By contrast, if you receive a company car instead, you pay BIK tax but no NI on the benefit — which can make it more tax-efficient depending on the vehicle's CO2 emissions.
It depends on your circumstances. A car allowance gives you flexibility and is generally better for high-mileage drivers who can claim HMRC approved mileage rates. A company car — particularly an electric one with the 3% BIK rate — can be considerably more tax-efficient for lower mileage drivers or those who want a premium vehicle without managing running costs themselves.
A car allowance is added to your salary and taxed as income through PAYE. If you are a basic rate taxpayer you lose 20% income tax plus 8% National Insurance, so a £500/month allowance nets approximately £360/month after deductions. Higher rate taxpayers keep even less — around £290/month of a £500 allowance.
Yes. If your employer pays less than the HMRC approved mileage rate (45p for the first 10,000 business miles, 25p thereafter), you can claim tax relief on the difference. For example, if your employer pays 0p per mile and you drive 15,000 business miles, you can claim: (10,000 × 45p) + (5,000 × 25p) = £5,750 in relief. At 20% tax, that saves you £1,150 in tax.
The average UK car allowance in 2025 is approximately £400 to £600 per month for most employee grades. Field sales representatives typically receive £400–£500/month. Senior managers and regional directors receive £500–£750/month. C-suite executives may receive £750–£1,500/month or more. Allowances vary significantly by industry, with financial services and pharmaceuticals typically being more generous.
The car allowance itself is taxed identically regardless of what vehicle you drive — it is treated as salary. However, if you use an electric vehicle, the HMRC Advisory Electricity Rate for business reimbursement is 7p per mile. For HMRC's Approved Mileage Allowance Payments (AMAP), electric cars qualify for the same 45p/25p rates as petrol cars, meaning you can still claim the full amount if your employer pays less.
Benefit in Kind (BIK) tax on a company car is calculated as: P11D value (list price including options) × CO2 percentage band × your marginal income tax rate. For 2025/26, BIK rates range from 3% (zero emission EVs) to 37% (high CO2 petrol cars). Example: A £35,000 diesel car with 130g/km CO2 falls in the 31% band. BIK value = £35,000 × 31% = £10,850. Basic rate taxpayer pays £2,170/year in BIK tax.
This depends on your employer's pension scheme rules. Some schemes class the car allowance as pensionable pay, meaning contributions are calculated on your total salary including the allowance. Others exclude allowances from pensionable pay. Check your pension scheme documents or ask your HR department. If the allowance is pensionable, you'll benefit from additional employer contributions but will also pay more in employee contributions.