Company car vs car allowance: which saves you more in 2026

It’s Monday. Raining. You get called into a meeting with the boss. That can’t be good. But it is – they're offering you a company car. You surely must jump at the chance. Or should you? Actually, in some cases you might be wise to say: “Thanks, but no thanks.”

It depends entirely on your personal circumstances, but while there are undoubtedly a huge number of benefits to choosing a company car, it might not be the best choice for you. A cash alternative might better suit you.

It requires a bit of time and thought, but we can help. We’re about to explain to pluses and minuses associated with each choice, so you can map out the best route for you.

Then, once you know what you need, we can offer advice on picking the best car model.

Read more fleet and company car advice

What is a company car?

A company car is precisely what the term implies, because it’s a car that’s provided by your employer for you to carry out business journeys plus personal mileage. That’s what makes it a perk.

The benefits of a company car include the fact that your employer pays the leasing costs, plus insurance and maintenance expenses. The downside is that you’ll face a monthly Benefit-in-Kind (BiK) tax bill. The amount of this is dependent on the car’s P11D price (the list price including VAT, plus options and delivery fee), its emissions, and which tax bracket (20% or 40%) you are taxed in.

Try our company car tax calculator

What is a company car allowance?

A car allowance, which is also called a vehicle allowance for employees or cash for car allowance, is a fixed sum added to your monthly salary that you can use to fund your own vehicle. It will be a similar amount to what your company would have paid to lease a fleet car, minus personal income tax.

The good news is that you end up with an asset you can sell and replace whenever you want, which means you aren’t stuck with the same vehicle for three or four years (or however long the leasing agreement happens to be).

You can also choose the car you want, within reason, because you won’t be restricted to the choices on your employer’s company cars list. However, it’s wise to check before purchase that your company his happy for you to turn up to meetings  in a convertible or a sports car.

Read more: The best SUV company cars

Company car vs cash allowance: the key differences

Your circumstances provide a direct influence on whether you’re better off choosing the company-car option, or going for the car allowance instead.

As a rule of thumb, a higher-mileage driver will be better off choosing the company car because the employer covers all the running costs, and in some cases even the fuel.

However, anyone going down the company car route is restricted to vehicles on their employer company-car choice list, and will face Benefit-in-Kind (BiK) taxation based on the car’s emissions.

However,  a car allowance can better suit someone who does a lower mileage, because those who take this route will be required to pay for the car’s insurance, VED, maintenance and repairs. Doing fewer miles helps to minimise these costs. A car allowance also allows you to choose any car you want, as long as your employer approves. Bear in mind, though, that the addition of the car allowance to your salary will mean you’ll be liable for higher income tax.

In the table below we'll sum up the differences between the two in a table. Below, we go into each factor in more detail.

Read more: How BIK company car tax works

Ownership and responsibility

If you purchase a car using the cash allowance, you are the owner, and therefore responsible for the vehicle’s upkeep. If you go down the company car route, your employer or the leasing company will be the vehicle’s owner, while you are the registered keeper. Running costs won’t be your concern, although you will be liable for any fines from road traffic offences.

Tax treatment

If you've decided to take a company car, check out our best cars lists in various categories, which rank models by suitability for fleet car drivers.

Vehicle choice

Company car user-choosers are typically restricted to the range of vehicles on their company’s choice list. Those who choose the car allowance can purchase any car they want, subject to their company’s approval.

Running costs

A typical company car agreement will include all running costs, including annual VED, servicing, maintenance and fuel. The cash-allowance alternative means that the car’s registered keeper is responsible for all expenses incurred while running the vehicle.

How Company Car Tax Works

If you accept a company car from your employer you’ll be taxed on it. This is called Benefit-in-Kind taxation, and varies according to a number of factors, which we’ll explain here.

Benefit in Kind explained

His Majety’s Revenue and Customs (HMRC) defines your company car as a perk, and will tax you on it. This tax is called Benefit-in-Kind (BiK) and is worked out by taking your car’s P11D value (its list price, plus VAT, the cost of options and delivery fee), and multiplying this by its tax band, which is defined by the car’s CO2 emissions. Finally, this number is multiplied by your personal tax banding (20% or 40%) to give you an annual BiK charge, which is then divided into 12 monthly payments.

BiK rates by CO2 emissions

BiK taxation is divided in 31 percentage bands according to CO2 emissions, so if your car emits a high level of CO2, you’ll be liable for a higher rate of tax. And bear in mind that diesels that don’t reach RDE2 standard of efficiency will be liable for a 4% surcharge on their CO2 banding.

Hybrid cars that emit less than 50g/km of CO2 have a rate that’s based on the electric-only range they can travel before the engine kicks in. Meanwhile, electric cars emit no CO2 whatsoever, so are eligible for the lowest rates. The rates are set by HMRC, and are regularly updated and revised.

Company car tax bands: 2026-2030

Bear in mind that a 4% surcharge applies to diesel vehicles not meeting the RDE2 standard, so if, for example, your diesel emits 115g/km it will be liable for a 34% tax banding. 

Fuel benefit charge

If your company pays for fuel that covers both business and personal mileage, you’ll be taxed on it. Helpfully, HMRC has produced a ‘multiplier’ that relates to your company car’s BIK percentage.

For the two financial years from 2026 to 2028, the figure is £29,200; this  figure allows you to work out your fuel taxation in precisely the same way as you would work out your BiK using your car’s emissions percentage, after which you multiply the resulting figure by your personal income taxation percentage (20% or 40%).

Why do this calculation? Well, it gives you the knowledge of whether nor not you’ll do a personal mileage figure that’s high enough to make paying the extra tax worthwhile. If you won’t, then you’re better off getting rid of the company fuel card, because you’ll pay less to fuel the car than you would in tax.

Bear in mind that a 4% surcharge applies to diesel vehicles not meeting the RDE2 standard, so if, for example, your diesel emits 115g/km it will be liable for a 34% tax banding.

How company car allowance tax works

If you choose your company’s car allowance, then that sum is added to your salary. HMRC will then charge you income tax on the combined sum, so in the end you’ll have a bit less net income than the car allowance each month.

Claiming business mileage with AMAP rates

Approved mileage allowance payment (AMAP) rates are set by HMRC and show you and your employer just how much the taxman thinks you should be paid back before you’ll be liable for tax.

Up 10,00 miles, you can claim 45p per mile. However, once you go over 10k, you can claim only 25p per mile. To illustrate, a driver covering 12,000 miles in a year could claim £5,000 (10,000 x 45p, plus 2,000 x 25p).

Company Car Advantages

The advantages of a company car:

• New car every three or four years
• More suitable for high-mileage drivers
• Running costs, including insurance, servicing and repair, are covered
• Depreciation is irrelevant
• You’re not tied to a finance agreement

 Company Car Disadvantages

The disadvantages of a company car:

• You’re limited to cars on your company’s choice list
• You’ll pay BiK tax, which is steeper on higher-emission cars
• You will never own the car
• If you get fuel for personal use, you’ll be taxed on it

Car allowance advantages

The advantages of a car allowance

• You can invest in any car you want, subject to company approval
• You can use the funds to either buy a car or lease one
• At the end of a purchase agreement you’ll have an asset
• A good choice if your annual mileage is low

Car allowance disadvantages

The disadvantages of a car allowance

• Unsuitable for high-mileage drivers due to high running costs, which you pay for
• The car allowance is added to your salary, increasing your income tax bill
• Depreciation is the biggest cost of car ownership, and you’ll be liable

Best company cars for low BiK

If you’re in the market for a new company car, you won’t be surprised to learn that the best model to choose for keeping down your monthly Benefit-in-Kind tax bill are electric.

Electric company cars qualify for the lowest BiK rates due to the fact that they put out precisely no local emissions.

Plug-in hybrids with low CO2 emissions

However, if you’re a higher-mileage drive who wants to minimise their BiK bill, then a plug-in hybrid company car could be ideal. The best of these offer low BiK rates based on how far they can travel on battery power, but also offer the added benefit of a petrol engine for longer journeys.

When a company car saves you more

Mileage is key. If you’re a higher-mileage driver, then a company vehicle is the better option, because of the attendant cost benefits it brings.

High-mileage business drivers

So, if you are, for example, a sales representative who does a great many miles each year, having your car’s servicing, repairs and other costs covered by your company removes a huge financial burden. That’s because your car will need more regular servicing because you’ll hit the mileage limits more quickly, and on top of that consumable parts, such as tyres, will wear out more quickly.

Electric vehicle choosers

If you can make an electric vehicle fit into your work and home lifestyles, then an EV is the best choice as a company car. This is because BiK taxation is based upon a car’s CO2 emissions, and EVs don’t emit any so qualify for very low tax bills.

Those who prefer fixed costs

A company is often the better choice if you prefer to have predictability in your monthly car expenses, because you pay your BiK bill and that’s about it. Your company covers everything else.

When a car allowance saves you more

A car allowance better suits those who don’t drive much for work, and who want the freedom to choose their own vehicle.

Low-mileage drivers

If you don’t spend much on fuel and car maintenance because you don’t drive that many miles in the course of your employment, then taking the car allowance (plus AMAP fuel claims) can work out cheaper, even if you’ll pay extra income tax on the allowance.

Those with a suitable existing vehicle

A car allowance works well if you already own a vehicle you can depend on, because you receive the extra money without having to shell out to change your vehicle.

Drivers who want full control

It’s a matter of personal preference, but if the numbers for choosing a company car or taking a car allowance are similar, you might want to take the allowance simply because it allows greater ability to choose the sort of car you want. This also allows you full control of all motoring expenses.

Company car vs mileage reimbursement

If you already own a car that you’re happy with, perhaps you might be happy with simple mileage reimbursement, and the HMRC Approved Mileage Allowance Payment (AMAP) scheme gives an accurate idea of how much you’ll be paid for business mileage.

How AMAP rates work

AMAP rates are , in essence, a pence-per-mile reimbursement rate for employees who use their own cars for business mileage.

When mileage reimbursement makes sense

Mileage reimbursement typically happens when an employee who neither runs a company car nor receives a car allowance has to cover some business mileage in their own vehicle. This is usually someone who only occasionally travels on business.

How to calculate which option suits you

It pays to do your sums before making any sort of decision on whether to take a company car or a car allowance. So, now’s the time to get organised.

1. Estimate your annual business mileage

First step: work out roughly how many miles you'll drive for work each year — this is the biggest factor in the decision. If you do a lot of miles, a company car is the better choice, if you do fewer miles, a car allowance could work better for you.

2. Check the BiK rate for your preferred car

Next, check out your company’s car choice list, and look at the CO2 emissions bandings for each of them. The lower the better because it means lower BiK tax bills.

3. Compare the after-tax value of your allowance

Work out exactly how much you’ll receive each month in car allowance once the increased income tax and any National Insurance contributions have been deducted.

4. Factor in insurance, maintenance, and depreciation

The next thing to do is to work out how much you’ll pay in insurance, servicing, repairs and depreciation on your own car. Then subtract these annual costs from your car allowance to see if you’re up or down, financially speaking.

Choosing between a company car and car allowance

When you’re comparing company car vs car allowance, you really do have to work out your needs, how much you’ll spend in each scenario. And on top of that, you need to know what the cars you’re looking at are actually like to drive and live with. So, knowledge is key, and you can only gain that knowledge through thorough research.

That’s why it makes sense to compare the cars you like using What Car? company car reviews, and check out our company car tax calculator to work out exactly what you’ll pay for each in BiK.

You’ll already know how many miles you’re likely to cover, so add in how much you think you’ll have to pay to keep your own car running over the same period. Once you’ve done all that, the decision will be a whole lot easier.

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And if you're keen to keep benefit-in-kind tax down, we can help there too – see our cheapest company cars page.

Read more fleet and company car advice

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