The choice between a company car and a car allowance is one of the most consequential financial decisions you can make as an employee in 2026. The right answer depends on the type of vehicle on offer, your tax band, your mileage, and whether your employer offers a salary sacrifice electric car scheme. This guide runs through the numbers so you can decide with confidence.
Key Takeaways
- A car allowance is taxed as income, meaning a higher-rate taxpayer keeps roughly 52% of the headline figure after income tax and National Insurance.
- An electric company car is taxed at 4% BIK in 2026/27, making it dramatically cheaper than a petrol or diesel alternative taxed at 25%—37%.
- For most drivers who have access to an electric company car, the company car wins on after-tax cost.
- If only petrol or diesel company cars are available, a car allowance can often work out cheaper.
- Salary sacrifice electric car schemes offer a third option that frequently beats both in pure cost terms.
What Is the Difference Between a Company Car and a Car Allowance?
A company car is a vehicle your employer provides for your use. They own or lease it, insure it, service it, and handle VED. You pay tax on the benefit through your PAYE code in the form of a Benefit-in-Kind (BIK) charge.
A car allowance is a cash payment added to your salary in lieu of a company car. You receive the money, pay income tax and National Insurance on it, then use it to fund your own vehicle. You are responsible for all running costs.
The distinction matters because the two are taxed entirely differently.
How Is a Company Car Taxed?
HMRC calculates your company car tax using this formula:
Annual BIK charge = P11D value × BIK percentage × your income tax rate
The P11D value is the car’s list price including options, delivery, and VAT (but excluding the first registration fee and VED).
The BIK percentage depends on the car’s CO2 emissions. In 2026/27:
| Fuel type | Typical emissions | BIK rate 2026/27 |
|---|---|---|
| Fully electric (zero emission) | 0g/km | 4% |
| Efficient petrol | 100—110g/km | 25% |
| Average petrol | 120—130g/km | 30% |
| Petrol (high emission) | 150g+/km | 37% |
| Diesel (add 4% surcharge if not RDE2) | varies | varies |
The gap between electric and petrol BIK rates is significant. A 40% taxpayer in an electric car worth £40,000 pays:
£40,000 × 4% × 40% = £640 per year in company car tax (around £53 per month)
The same taxpayer in a £30,000 petrol car at 30% BIK pays:
£30,000 × 30% × 40% = £3,600 per year (around £300 per month)
How Is a Car Allowance Taxed?
A car allowance is simply added to your gross salary and taxed through PAYE. There is no BIK calculation. You pay income tax at your marginal rate and National Insurance on the full amount.
What a £6,500 annual car allowance is actually worth:
| Tax band | Gross allowance | Income tax | Employee NI | Take-home |
|---|---|---|---|---|
| Basic rate (20%) | £6,500 | £1,300 | £520 | ~£4,680 |
| Higher rate (40%) | £6,500 | £2,600 | £520 | ~£3,380 |
Your employer also pays 15% employer NI on the allowance, so the total cost to them is higher than it appears.
Once you subtract what you spend on insurance, servicing, tyres, and depreciation on your own vehicle, the real benefit of the allowance shrinks further.
Company Car vs Car Allowance: Side-by-Side Comparison
| Factor | Company car (electric) | Company car (petrol) | Car allowance |
|---|---|---|---|
| Tax basis | BIK on P11D value | BIK on P11D value | Income tax + NI on full amount |
| 2026/27 tax rate | 4% BIK | 25—37% BIK | Marginal income tax rate |
| Running costs | Employer pays | Employer pays | Employee pays |
| Insurance | Employer handles | Employer handles | Employee arranges (inc. business use) |
| Vehicle choice | Employer’s fleet | Employer’s fleet | Your choice |
| Flexibility | Limited | Limited | High |
| Risk | Low | Low | Employee carries depreciation/running cost risk |
Which Is Better in 2026: the Numbers
Scenario 1: Employer offers an electric company car
A higher-rate taxpayer (40%) is offered a choice between:
- Option A: Tesla Model Y (P11D ~£46,000) as a company car
- Option B: £7,200 annual car allowance
Option A (electric company car): Annual BIK tax = £46,000 × 4% × 40% = £736/year (~£61/month) Running costs paid by employer.
Option B (car allowance):
Take-home after 40% tax and NI: £4,180/year (£348/month)
But you must pay insurance (£900/year), servicing (£600/year), tyres (~£300/year), and depreciation on a car of comparable value. Those costs easily exceed the after-tax allowance.
Verdict: company car wins comfortably when the vehicle is electric.
Scenario 2: Employer offers only petrol company cars
A higher-rate taxpayer is offered:
- Option A: Ford Kuga petrol (P11D ~£35,000, 150g/km CO2, 33% BIK)
- Option B: £5,500 annual car allowance
Option A (petrol company car): Annual BIK tax = £35,000 × 33% × 40% = £4,620/year (~£385/month) Running costs paid by employer, but you pay £385/month in tax alone.
Option B (car allowance): Take-home: ~£3,190/year. If you drive a modest, efficient petrol car with lower running costs, this can work out ahead.
Verdict: car allowance is often better when only high-emission company cars are on offer.
Scenario 3: Employer offers salary sacrifice
If your employer offers a salary sacrifice EV scheme, it frequently beats both options. You sacrifice gross salary before tax, reducing your taxable income. The BIK charge on an electric car is still 4% in 2026/27, but your income tax and NI savings on the sacrificed salary can offset much of that cost.
See our full guide to salary sacrifice electric cars to model what a scheme would cost you.
Other Factors to Weigh Up
Business mileage: With a company car, your employer covers fuel or provides an advisory rate reimbursement. With a car allowance, you rely on HMRC’s 45p-per-mile approved rate from your employer (first 10,000 miles), which may or may not cover your real costs depending on the vehicle and fuel.
Pension contributions: Your employer’s NI saving through salary sacrifice can be directed into your pension, boosting retirement savings.
Mortgage affordability: A car allowance appears as gross income on your payslip, which some lenders treat more favourably than a salary sacrifice deduction. If you are about to apply for a mortgage, check with your lender how they treat each arrangement.
Job changes: Company cars and salary sacrifice schemes are tied to employment. A car allowance is cash in hand that continues to your next employer more easily.
What About the National Insurance Angle for Employers?
Employers pay 15% employer NI on a car allowance. On a £6,500 allowance that is £975 per year in additional NI. A salary sacrifice scheme eliminates this cost because the sacrifice happens before NI is calculated. Some employers redirect those savings into the scheme, effectively subsidising the employee’s electric car.
Frequently Asked Questions
Is a car allowance or company car better for tax? In 2026/27, an electric company car is significantly more tax-efficient than a car allowance for most higher-rate taxpayers. The BIK rate for zero-emission cars is 4%, compared with up to 37% for high-emission petrol cars. For petrol or diesel company cars, a car allowance can work out cheaper depending on your mileage and the allowance amount.
Can I have both a company car and a car allowance? No. Employers offer one or the other for the same role, though some provide a car allowance to supplement a salary sacrifice scheme. The two arrangements are distinct and are taxed differently.
Does a company car affect my personal tax code? Yes. HMRC adjusts your tax code to collect BIK tax through PAYE, reducing your personal allowance by the taxable value of the car benefit. This means you pay more income tax each month without seeing a separate bill.
What happens if I give up a company car mid-year? Your employer must report the change to HMRC. Your tax code is adjusted, and you stop paying BIK tax from the date the car is returned. If you switch to a car allowance instead, that starts being taxed as income from the same point.