Glossary · UK
What is Car Allowance?
A cash payment from an employer in lieu of a company car. Taxable as employment income via PAYE and National Insurance, unlike a company car Benefit in Kind.
Full Definition
A car allowance is a sum of money paid by an employer to an employee instead of providing a company car. Unlike a company car (which is taxed as a Benefit in Kind based on the car's list price and CO2 emissions), a car allowance is treated as ordinary employment income: it is added to your gross salary and taxed under PAYE at your marginal rate, with employee and employer Class 1 National Insurance also due. This can make a car allowance less tax-efficient than a low-emission company car for some employees, but gives greater flexibility — the employee buys or leases any vehicle they choose. The key financial advantage is that employees using their own car for business travel can claim the HMRC Approved Mileage Allowance Payment (AMAP) rate of 45p per mile for the first 10,000 business miles and 25p per mile thereafter, which is tax-free. If the employer pays less than the AMAP rate, the employee can claim Mileage Allowance Relief for the shortfall via Self Assessment or a P87 form. Car allowances are common in sales roles and jobs requiring regular travel. When evaluating an offer, compare the post-tax car allowance against the actual cost of running a suitable vehicle plus insurance, depreciation, and maintenance.