Company Car vs Car Allowance in 2026: Which Leaves You Better Off?

If your employer offers a choice between a company car and a cash car allowance, the decision is worth real money — often £1,000 to £4,000 a year in either direction. The catch is that there is no single right answer. The maths flips entirely depending on whether you go electric, petrol or hybrid, what tax band you sit in, and how many miles you drive.

This guide works through how each option is taxed in 2026/27, runs the numbers for three realistic cars, and gives you a clear rule of thumb for deciding.

How a car allowance is taxed

A car allowance is the simplest of the two to understand because there is nothing special about it. It is extra salary. It goes through payroll and is taxed exactly like the rest of your pay:

• Income tax at your marginal rate — 20%, 40% or 45%
• Employee National Insurance at 8% on earnings between £12,570 and £50,270, then 2% above £50,270

So a £6,000 allowance is not £6,000 in your pocket. For a basic-rate taxpayer it is reduced by 20% tax and 8% NI, leaving about £4,320. For a higher-rate taxpayer earning over £50,270 it is reduced by 40% tax and 2% NI, leaving about £3,480.

You then use that cash however you like: buy, lease or finance a car, insure it, fuel it and maintain it — all out of taxed income. The upside is total freedom and no Benefit-in-Kind charge. The downside is that you carry all the risk and cost yourself, and because the allowance pushes up your gross pay, it can nudge you into higher-rate tax, the £60,000 High Income Child Benefit Charge, or the brutal £100,000 personal allowance taper.

You can see exactly what an allowance adds to your net pay by running your salary with and without it through the take-home pay calculator.

Claiming business mileage on your own car

If you take the allowance and use your own car for work journeys (not commuting), you can claim Approved Mileage Allowance Payments (AMAP):

• 45p per mile for the first 10,000 business miles in the tax year
• 25p per mile for every business mile above 10,000

These payments are tax-free. If your employer reimburses less than the AMAP rates, you can claim tax relief on the shortfall through Self Assessment. For someone covering 12,000 business miles a year, AMAP is worth £5,000 tax-free (10,000 × 45p + 2,000 × 25p) — a meaningful sweetener that often tips the decision towards the allowance for high-mileage drivers.

How a company car is taxed

A company car is taxed as a Benefit-in-Kind (BiK). You do not pay for the car itself, but you pay tax on a percentage of its value every year you have it.

The taxable benefit is calculated as:

P11D value × BiK percentage = taxable benefit

The P11D value is the car's list price including VAT and most optional extras (you can deduct a capital contribution of up to £5,000 if you pay one). The BiK percentage is set by HMRC based on the car's CO2 emissions — the dirtier the car, the higher the percentage.

You then pay income tax on that taxable benefit at your marginal rate. There is no employee National Insurance on a company car benefit, but your employer pays Class 1A NI on the benefit value.

The BiK bands range from just 4% for fully electric cars in 2026/27 up to 37% for the highest-emitting petrol and diesel cars. That spread is the single most important fact in this whole comparison. An electric company car is taxed on a sliver of its value; a thirsty petrol SUV is taxed on more than a third of its value every year.

You can model the annual tax on any specific car with the company car BiK calculator.

The 2026/27 BiK rates you need to know

For 2026/27, the figures that matter most are:

• Electric (0g/km CO2): 4% — up from 3% in 2025/26, rising to 5% in 2027/28
• Plug-in hybrids (1-50g/km): between roughly 5% and 18% depending on electric-only range — the further it goes on battery alone, the lower the rate
• Petrol/diesel (110-150g/km): typically 27% to 37%

A diesel that does not meet the RDE2 emissions standard adds a 4% surcharge, capped at the 37% maximum. These bands are why the same £40,000 of list price can produce a £1,600 taxable benefit (EV) or a £14,000 taxable benefit (petrol).

Worked example 1: the electric car

Let's compare a £45,000 electric car offered as a company car against a £6,000 cash allowance, for a higher-rate (40%) taxpayer.

Company car (EV):

• Taxable benefit: £45,000 × 4% = £1,800
• Income tax at 40%: £720 per year (£60 a month)
• The employer covers the lease, insurance, maintenance and breakdown cover
• Electricity is cheap — charging at home is the equivalent of well under 10p per mile

Cash allowance:

• £6,000 gross becomes about £3,480 after 40% tax and 2% NI
• Out of that £3,480 you must fund the lease or finance, fully comprehensive insurance, servicing, tyres and depreciation on a £45,000 car

For an EV, the company car wins comfortably. A taxable benefit of £1,800 is trivially small, and the £3,480 net allowance comes nowhere near covering the real-world cost of running an equivalent electric car yourself. This is also why salary sacrifice EV schemes are so popular — they bundle the company car's low BiK with the saving from giving up gross salary.

Worked example 2: the petrol car

Now the same £6,000 allowance versus a £32,000 petrol car emitting 130g/km CO2, for a higher-rate taxpayer. At 130g/km the BiK rate is around 31%.

Company car (petrol):

• Taxable benefit: £32,000 × 31% = £9,920
• Income tax at 40%: £3,968 per year — roughly £330 a month, just in tax
• You still get the convenience of a fully provided car

Cash allowance:

• £6,000 gross becomes about £3,480 net
• You could buy a two- or three-year-old equivalent for £18,000-£20,000, finance it, insure it and run it — and if you cover real business miles, AMAP adds thousands of tax-free pounds on top

Here the allowance usually wins. Paying nearly £4,000 a year in tax for the privilege of a company petrol car is hard to justify when a sensible used purchase plus your net allowance (and any mileage claims) leaves you better off. The gap only widens for the highest-emitting cars at the 37% cap.

Worked example 3: the plug-in hybrid

Plug-in hybrids sit awkwardly in the middle. A PHEV with a good electric-only range (over 70 miles) can fall into a low BiK band, making it look almost as cheap as an EV on paper. But there is a real-world trap: the headline efficiency and low CO2 figures assume you actually charge the battery regularly. If you mostly drive on the petrol engine — common for high-mileage drivers — your fuel costs balloon while you are still paying for a heavy, complex car.

As a rule, a PHEV company car only makes sense if (a) it lands in a genuinely low BiK band, and (b) you will plug it in most days. Otherwise the petrol-car logic applies and the allowance tends to win.

The rule of thumb

Strip away the detail and the decision usually comes down to one question — what kind of car?

• Going electric? Take the company car. The 4% BiK rate makes it the cheapest way to drive a new EV, especially via salary sacrifice.
• Want a petrol or diesel? Take the allowance — particularly if you do high business mileage (AMAP is valuable) or you are happy buying used and keeping the car a few years.
• Plug-in hybrid? Only take the company car if it sits in a low BiK band and you will charge it daily; otherwise treat it like a petrol car and lean towards the allowance.

Two more things to weigh. First, check what happens to your tax thresholds: a £6,000 allowance added to a £48,000 salary pushes you over £50,270 into higher-rate tax on part of your income, and an allowance can drag you into the £60,000 Child Benefit charge or the £100,000 taper. A company car's BiK value also counts towards that £100,000 adjusted-net-income figure. Second, factor in risk: a company car shifts depreciation, repairs and breakdown onto your employer, which has real value if you would rather not gamble on a used purchase.

Before you commit, run both scenarios through the numbers. Model your salary with and without the allowance in the income tax calculator, and price the BiK on any car you are offered with the company car tax calculator. Five minutes of arithmetic can be worth several thousand pounds a year.

Frequently asked questions

The short version: electric company cars are taxed so lightly that they almost always beat a cash allowance, while petrol and diesel company cars are taxed so heavily that the allowance usually wins. Run your own figures before deciding — the answers below cover the questions that trip people up most.