Company Car vs Car Allowance

A company car is provided and maintained by the employer, and taxed as a benefit. An allowance is cash added to salary, taxed as income, from which you fund a vehicle yourself.

How company car tax works

The taxable benefit is generally calculated from the vehicle's list price and its emissions, producing a figure taxed at your marginal rate.

Because the calculation is emissions-linked in most systems, low-emission and electric vehicles attract dramatically lower benefit charges than conventional ones. This has made electric company cars extremely tax-efficient in several markets, sometimes to the point where the tax on an expensive electric car is lower than on a modest petrol one.

The list price used is generally the full price including options, not what the employer actually paid, which is why adding options increases the tax for years.

What the allowance gives you

Freedom of choice, including buying used, buying cheaply, or keeping a car you already own and pocketing the difference.

It is taxed as ordinary income, so the net amount is considerably less than the headline figure.

You carry everything: purchase, depreciation, insurance, servicing, tyres, breakdown cover and repairs. Those costs are real and frequently underestimated when comparing against the allowance figure.

Mileage reimbursement

This is where the comparison is often decided and frequently ignored. Business mileage rates differ between company cars and privately owned vehicles, and the difference matters at high mileage.

Where you use your own car for substantial business mileage, the reimbursement rate against your actual cost per mile determines whether the allowance works. If the rate falls short of your real cost, high mileage erodes the allowance quickly.

Keep accurate mileage records either way, since tax relief may be available where reimbursement falls below approved rates.

Risk and flexibility

A company car transfers risk to the employer: depreciation, unexpected repairs, and the hassle of disposal are not your problem.

It also ties you to the employer. Leaving means returning the car, which can be awkward if you have no alternative vehicle and limited notice.

An allowance leaves you with an asset and a liability. If you finance a car over four years and change jobs after one, the finance agreement continues regardless.

Running the comparison

Calculate the annual tax cost of the company car option at your marginal rate. Calculate the net allowance after tax.

Then estimate the full annual cost of running an equivalent car yourself, including depreciation — which is the item people leave out and which usually dominates.

Add the mileage reimbursement difference across your expected business miles.

For low-emission vehicles the company car frequently wins comfortably. For conventional vehicles, and for people happy to run something modest and older, the allowance often does.