Your Car Allowance Details
Frequently Asked Questions
How much tax do I pay on a car allowance?
A car allowance is treated as salary and is subject to income tax and employee National Insurance. A basic rate (20%) taxpayer with an 8% NIC rate will keep around 72% of their gross allowance. A higher rate (40%) taxpayer with 2% NIC will keep about 58% after tax. The HMRC mileage allowance for business trips is tax-free on top of this.
What are the HMRC mileage rates for car allowance recipients in 2026?
For 2026, HMRC approved mileage rates are 45p per mile for the first 10,000 business miles per tax year, and 25p per mile for any miles over 10,000. You can claim an additional 5p per mile per passenger also making the trip for business. These payments are tax-free for the employee.
What is Mileage Allowance Relief (MAR)?
If your employer pays you less than the HMRC approved mileage rate (45p/25p), you can claim tax relief on the shortfall through self-assessment or by contacting HMRC. This is called Mileage Allowance Relief (MAR). For example, if your employer pays 30p/mile and you drive 10,000 miles, you can claim relief on (45p - 30p) × 10,000 = £1,500 at your income tax rate.
Is it better to take a car allowance or a company car?
A car allowance gives you flexibility and ownership, but you bear all risks. A company car is simpler and includes a new car, but you pay BiK tax based on the car's list price and CO2 emissions. For high-emission cars, BiK tax can easily exceed the net value of a car allowance. Electric or low-emission company cars tend to have very low BiK tax — often making the company car the better deal.
Can I claim VAT on mileage if I get a car allowance?
If you are VAT registered (e.g. self-employed), you can reclaim VAT on the fuel element of your HMRC mileage claim. The fuel element is based on HMRC advisory fuel rates. You must keep fuel receipts. Most employees receiving a car allowance are not VAT registered and cannot reclaim VAT on mileage.