A car allowance looks like free money and a company car looks like a perk. Tax turns both into numbers, and the numbers usually make the decision for you.

How each one is taxed

A car allowance is just salary. Income Tax and National Insurance come off it at your normal rates, and your employer pays employer National Insurance on top. What lands in your bank is the allowance minus tax.

A company car is taxed as a benefit in kind. The taxable value is the car’s list price multiplied by a percentage set by its CO2 emissions, from 4% for a zero-emission car to 37% at the dirty end. You pay Income Tax on that value, not on the car. Your employer pays 15% Class 1A National Insurance on the same value.

Worked example: petrol car

A £35,000 petrol car emitting 130g/km. The 2026/27 table puts 130g at 32%. Taxable benefit: £35,000 x 32% = £11,200.

• Higher rate taxpayer (40%): £4,480 a year in tax, £373 a month through your tax code
• Basic rate taxpayer (20%): £2,240 a year

Against that, a £6,000 allowance for a higher rate taxpayer loses 40% tax and 8% employee NI, leaving £3,120 a year, £260 a month, towards running your own car. The company also saves the £1,680 of Class 1A it would have paid on the car benefit.

For the petrol car, the allowance usually leaves the employee better off in cash terms, though it has to cover insurance, servicing, tyres and depreciation, which the company car absorbs.

What flips it

Low emissions. The same £35,000 as an electric car has a taxable benefit of £35,000 x 4% = £1,400, so £560 a year for a higher rate taxpayer. No cash allowance comes close to that, which is why the electric question gets its own answer on this site.

If you drive your own car for work

Whether you take the allowance or not, mileage in your own car is paid at the approved rates: 55p a mile for the first 10,000 business miles in 2026/27, 25p after that, tax free. The 55p rate is new for this tax year; for years it was 45p.

Sources

All pages checked 20 October 2026.

• Company car benefit appropriate percentages (480: Appendix 2): https://www.gov.uk/guidance/company-car-benefit-the-appropriate-percentage-480-appendix-2
• Tax on company cars: https://www.gov.uk/tax-company-benefits/tax-on-company-cars
• Rates and thresholds for employers 2026 to 2027: https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2026-to-2027

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