The company car is still considered a desirable job perk but many employers are now offering a company car allowance as an alternative to a company car. But what is the difference between a company car and a company car allowance and which option is right for you?

If you’ve been lucky enough to be offered a company car by your employer and you are able to use it for personal transport outside of work, you will need to pay company car tax on the vehicle, also known as ‘Benefit In Kind’ (BIK). This is because your company car is considered a ‘perk’ paid for by your employer on top of your annual salary and as a result has an indirect financial benefit.

The BIK tax rate calculation on a company car is based on:

  • The age of the car
  • The fuel type
  • The CO2 emissions
  • The engine size
  • The list price of the car

The amount of company car tax you’ll pay also depends on your personal income tax bracket so if you’re a 20% tax payer, you’ll pay 20% of the taxable portion of the car’s P11D value and if you’re a 40% tax payer, you’ll pay 40% on the taxable portion of the P11D value. This amount is usually deducted from your monthly pay.

What are the pros and cons of a company car?


  • You’re not personally tied into a financial contract
  • Insurance, servicing or maintenance worries are usually covered by the employer
  • There’s no depreciation costs as you never own the vehicle
  • Benefit in kind (BIK) tax rates are usually a fraction of the car’s final cost
  • You get to drive a brand new model every three or four years


  • Restrictions set by the employer may mean you do not get a choice of vehicle
  • Company BIK rates can be expensive for high value vehicles
  • If fuel is included as part of your package, you’ll also need to pay a fuel benefit each month
  • You’ll never own the car
  • If you leave your current job, the car stays with your employer

What is a company car allowance?

A company car allowance is a cash allowance added to your annual salary which allows you to buy or lease a vehicle privately. A company car allowance is becoming increasingly popular with employers as an alternative to a company car as it offers the employee of the perks of a new vehicle without the employer having the hassle of running a car fleet.

While do you not have to worry about company car tax rates with a company car allowance, as the cash alternative is paid as part of salary, it will be taxed at the normal income tax rate and the contributions from your employer will also be taxed at source, just as your salary is.

What are the pros and cons of a company car allowance?


  • You can choose whatever car you want
  • If you choose to buy outright, you’ll own the vehicle and can sell it in the future
  • If your annual mileage is low, you’re likely to better off financially
  • If you already own a car the cash sum may help ease other financial burdens
  • You can choose the best finance method for you


  • You must take the finance out in your own name
  • The company car allowance is subject to your rate of personal income tax
  • You will be responsible for paying for your own insurance, maintenance and road tax
  • High mileage (10,000+) can make private schemes expensive

As the option that saves you the most money is usually the preferred route for most people, it may be helpful to work out the most cost-effective route for you. One way to do this is to take the monthly car allowance being offered to you and deduct any tax or National Insurance contributions. You then need to add in the tax saving of not driving a company car. Compare this to the costs involved in driving a company car and think about whether the money you have left will allow you to cover your remaining motoring costs such as insurance, repairs and depreciation. Don’t forget to factor in any fuel benefit offered on your company car.

It is also important to consider your personal circumstances. For instance, if you expect to do a lot of private mileage, then you may be better off with a company car allowance rather than a company car. It also depends on whether you want the security of owning your own vehicle or whether you would prefer to drive a company car to avoid the expense of depreciation.