Choosing between a company car and a car allowance can swing your annual take-home pay by thousands of pounds. In 2026/27, updated BIK rates, higher employer NIC at 15 %, and the continued electric-vehicle incentive make the comparison more nuanced than ever.
This guide breaks down exactly how each option is taxed, what each costs employer and employee, and when one clearly beats the other — with a full worked example based on a £45,000 salary.
How a Company Car Is Taxed
A company car is a vehicle owned or leased by your employer that you can also use for personal journeys. Because private use has a monetary value, HMRC charges Benefit in Kind (BIK) tax on it.
The formula:
P11D value x BIK percentage x your income-tax rate = annual tax
The P11D value is the list price including options and delivery but excluding first-year registration fee and road tax. The BIK percentage depends on CO2 emissions. For 2026/27 the range runs from 4 % for a zero-emission electric car up to 37 % for the highest-emission petrol or diesel.
Employee cost — you pay income tax on the BIK value through PAYE.
Employer cost — the employer pays Class 1A NIC at 15 % on the full BIK value. There is no employee NIC on a company-car benefit.
That final point is important: unlike a car allowance, a company car triggers zero employee NIC, which can make a significant difference for higher earners.
How a Car Allowance Is Taxed
A car allowance is simply cash added to your salary. HMRC treats it as earnings, so the full amount attracts:
- Income tax at your marginal rate (20 % or 40 %)
- Employee Class 1 NIC — 8 % on earnings between £12,570 and £50,270, then 2 % above
- Employer Class 1 NIC — 15 % on the allowance above the secondary threshold
In short, every pound of car allowance is taxed the same as a pound of salary. A £6,000 allowance does not put £6,000 in your pocket — the net amount is considerably less once tax and NIC are deducted.
The upside is that when you use your own car for business travel, you can claim HMRC’s Approved Mileage Allowance Payment (AMAP) of 45p per mile for the first 10,000 miles and 25p per mile thereafter. This can offset a large part of the tax hit if your business mileage is high enough.
NIC: The Hidden Cost Employers and Employees Miss
National Insurance is often the overlooked factor that tips the balance.
Company car route:
| Item | Who pays | Rate |
|---|---|---|
| BIK tax | Employee | 20 % or 40 % of BIK value |
| Class 1A NIC on BIK | Employer | 15 % of BIK value |
| Employee NIC | — | None on BIK |
Car allowance route:
| Item | Who pays | Rate |
|---|---|---|
| Income tax | Employee | 20 % or 40 % of allowance |
| Employee NIC | Employee | 8 % (or 2 % above £50,270) |
| Employer NIC | Employer | 15 % of allowance |
For the employer, the NIC cost on a car allowance is almost always higher than the Class 1A on a low-emission company car. For the employee, paying 8 % NIC on top of income tax shrinks the net allowance further. This double NIC burden is the main reason a company car — especially an electric one — often wins on pure numbers.
Worked Example: £45K Salary, Petrol Company Car vs £500/Month Cash Allowance
Let us put real numbers on the two options for a basic-rate taxpayer earning £45,000.
Option A — Company car (petrol, P11D £35,000, 28 % BIK)
- BIK value: £35,000 x 28 % = £9,800
- Employee income tax: £9,800 x 20 % = £1,960 per year
- Employee NIC: £0
- Total employee cost: £1,960 per year
- Employer Class 1A NIC: £9,800 x 15 % = £1,470 per year
Option B — Car allowance of £500/month (£6,000/year)
- Income tax: £6,000 x 20 % = £1,200
- Employee NIC: £6,000 x 8 % = £480
- Total employee deductions: £1,680
- Net cash received: £4,320
- Employer NIC: £6,000 x 15 % = £900
At first glance the car allowance appears cheaper for the employee (£1,680 vs £1,960). But the employee must now fund a car — purchase or lease, insurance, servicing, fuel, and depreciation — out of that £4,320. Unless business mileage claims close the gap, the real cost of running a personal car can easily exceed the company-car tax bill.
Add 8,000 business miles with a car allowance:
- AMAP claim: 8,000 x 45p = £3,600 (tax-free reimbursement)
- Actual running cost estimate for a mid-range petrol car: roughly £3,200
- Net mileage gain: approximately £400 tax-free
In this scenario the car allowance plus mileage recoup gives the employee a workable total, but margins are thin. Change the car to a higher BIK band or reduce the mileage, and the company car wins.
When an Electric Company Car Wins Outright
The 2026/27 BIK rate for a pure electric vehicle is just 4 %. This changes the arithmetic dramatically.
Electric company car (P11D £40,000, 4 % BIK):
- BIK value: £40,000 x 4 % = £1,600
- Employee tax (basic rate): £1,600 x 20 % = £320 per year
- Employee tax (higher rate): £1,600 x 40 % = £640 per year
- Employee NIC: £0
- Employer Class 1A NIC: £1,600 x 15 % = £240 per year
Compare that with the £1,680 employee cost (before running expenses) on a £6,000 car allowance, and the EV company car delivers a brand-new £40,000 vehicle for a fraction of the tax. For a 40 % taxpayer, the saving is even starker: £640 per year for the EV versus over £2,520 in tax and NIC on the same cash allowance.
If your employer offers a salary-sacrifice scheme for an electric car, the numbers improve further because the gross-salary reduction lowers both income tax and NIC for employer and employee. See our full guide to salary sacrifice for an electric car vs buying for a detailed comparison.
When a Car Allowance Wins
A car allowance still makes sense in several situations:
- High business mileage — if you drive 12,000+ business miles per year, the 45p AMAP claim generates substantial tax-free income that can outweigh the NIC cost on the allowance.
- High earners with low-emission personal cars — a 40 % taxpayer who already owns an efficient petrol or electric car may prefer the flexibility of cash plus mileage claims, especially if the company car on offer has a BIK rate above 25 %.
- Generous allowance, modest car — if the allowance is £7,000–£8,000 and you run a low-cost vehicle, the surplus cash (after tax) can exceed the company-car benefit.
- Flexibility — you choose the make, model, colour, and insurance. No fleet-list restrictions.
The key is to run the numbers for your own mileage, tax band, and the specific BIK rate of the car on offer. Our companion car allowance vs company car calculator walks you through step by step.
How to Keep Accurate Mileage Records
Whichever option you choose, HMRC expects you to keep a contemporaneous mileage log. For company-car drivers claiming fuel via Advisory Fuel Rates and for car-allowance holders claiming 45p per mile, the record must show the date, start and end locations, purpose, and miles driven for each business journey.
Tripbook automates this entirely. The app detects every trip, classifies business and personal journeys, and produces HMRC-ready reports you can hand straight to your employer or accountant. No spreadsheets, no forgotten entries — just accurate records that protect your claims if HMRC ever asks.
For more on the current BIK bands, read our guide to company car tax 2026/27 and BIK rates. If you need a refresher on the approved mileage rates, see HMRC mileage rate 2026.
Download Tripbook from the App Store and start logging every business mile automatically — whether you drive a company car or your own.
