How is a car allowance taxed in the UK?

Full answer

A car allowance is a cash payment added to your salary by your employer to help you buy or run your own vehicle. Because it is paid as cash, HMRC treats it as earnings, meaning it is subject to Income Tax through PAYE at your marginal rate (20%, 40% or 45%) and National Insurance at 8% on amounts within the NI bands. This is the key difference from a company car: a company car is taxed on a benefit-in-kind (BIK) value that depends on the car's list price and CO2 emissions, which is often lower than the equivalent cash allowance for higher-emission vehicles. With a car allowance you use your own car for work, which means you can claim Approved Mileage Allowance Payments (AMAP) tax relief. The HMRC approved mileage rates are 45p per mile for the first 10,000 business miles in the year, and 25p per mile above 10,000. If your employer reimburses you at a lower rate than 45p, you can claim the shortfall as a deduction through your tax code or Self Assessment, reducing your taxable income. If your employer pays you more than 45p per mile, the excess is taxable. For a higher-rate taxpayer, each mile claimed at 45p saves 40p x 45p = 18p in Income Tax and a further NI saving at 2%. You should keep a mileage log recording dates, destinations and business purpose to support any mileage claim. Car allowances are often paid to employees who prefer flexibility in car choice -- you own the car and any depreciation risk. Compare the after-tax value of a car allowance against the BIK cost of a company car, particularly for zero-emission or low-emission vehicles which attract very low BIK rates, using a take-home pay calculator.

Try the calculator

More answers

• What is the benefit in kind for a van in the UK 2026/27?