Company Car Allowance vs Company Car: The Tax Comparison for 2026/27
Take the cash allowance and buy your own car, or take the company car and pay Benefit in Kind? A worked 2026/27 comparison including tax, National Insurance and running costs.
How each option is taxed
Cash car allowance
A cash allowance (e.g. an extra amount added to monthly pay) is simply salary. It's subject to normal Income Tax and Class 1 National Insurance for the employee, and Class 1 employer NI for the employer β no special car-specific tax treatment applies at all.
Salary Sacrifice Calculator
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Open Salary Sacrifice calculatorCompany car (Benefit in Kind)
A company car is taxed differently: HMRC calculates a Benefit in Kind (BIK) value based on the car's list price (P11D value) multiplied by a percentage set according to the car's CO2 emissions (and electric range for hybrids). That BIK value is added to taxable income and taxed at the employee's marginal rate, and the employer pays Class 1A National Insurance on the same value β there's no employee NI on the BIK itself.
P11D / Benefits-in-Kind Calculator
Calculate the tax cost of UK benefits-in-kind: company car, medical insurance, gym membership and more.
Open P11D / BIK calculatorWhy electric cars tip the balance
Fully electric company cars have historically sat in a far lower BIK band than equivalent petrol or diesel cars, reflecting government policy to encourage EV adoption through the company car tax system. For an employee choosing between a cash allowance (fully taxed as salary) and an electric company car (taxed at a low BIK percentage of list price), the company car route is often significantly cheaper in tax terms β sometimes decisively so. BIK percentage bands are reviewed periodically, so always check the current year's rates before assuming a specific figure.
A simplified worked comparison
| Scenario | Cash allowance | Company car (low-emission) |
|---|---|---|
| Amount taxed | Full allowance, taxed as salary | BIK value (list price Γ CO2-based %), typically much lower than list price |
| Employee NI | Yes, at standard rates | None on the BIK itself |
| Who owns/insures the car | Employee | Employer (or leasing company) |
| Running cost exposure | Employee bears servicing, insurance, depreciation | Often bundled into the company scheme |
The exact numbers depend entirely on the car's list price, its CO2 rating, and the size of the cash allowance on offer β there's no single "always cheaper" answer, and it's worth running both scenarios through a payslip-level calculation before deciding.
Non-tax factors that matter just as much
- Choice and personal preference β a cash allowance lets the employee pick any car (or none at all, banking the cash), while a company car scheme usually restricts choice to an approved list.
- Mileage β high-mileage drivers may benefit more from bundled maintenance/fuel arrangements in a company car scheme.
- Job changes β a company car typically has to be returned on leaving the job, whereas a car bought with a cash allowance remains the employee's own asset.
Sources
- gov.uk: Tax on company cars
- gov.uk: Company car and car fuel benefit calculator
- gov.uk: Expenses and benefits: company cars
Frequently asked questions
Is a cash car allowance taxed differently to a company car?
Yes β a cash allowance is simply added to salary and taxed as normal income tax and National Insurance through PAYE, whereas a company car is taxed as a Benefit in Kind based on the car's list price and CO2 emissions, which can be cheaper or more expensive depending on the specific car.
Are electric company cars still cheaper from a tax perspective?
Generally yes β fully electric company cars have historically attracted a much lower Benefit in Kind percentage than petrol or diesel equivalents, making them one of the most tax-efficient ways to get a car through an employer, though rates are reviewed periodically so check the current year's BIK bands.
Does taking the cash allowance mean giving up all company car benefits?
Usually yes β the cash allowance replaces the company car entirely, meaning the employee is responsible for buying, insuring, maintaining and eventually replacing their own car, with no employer-provided fuel or maintenance either.
Try the calculators
P11D / Benefits-in-Kind Calculator
Calculate the tax cost of UK benefits-in-kind: company car, medical insurance, gym membership and more.
Car Finance Calculator
Calculate monthly payments for PCP, HP and personal loan car finance. See total cost and interest paid over the term.
Salary Sacrifice Calculator
Calculate how much tax and National Insurance you save by making salary sacrifice contributions to a pension, cycle to work scheme or EV car scheme.
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