There are a number of ways in which your company can provide vehicle benefits for you and one which is growing in popularity is the car allowance.

We’ve put together this guide to help you understand how a car allowance works, the financial implications and benefits and everything else you need to know to make an informed decision on whether it’s the right choice for you.

What is a Company Car?

A company car is a vehicle that is supplied or funded by your employer. 

In order to differentiate between a car supplied and funded by your employer and financing one most businesses will only call a car they supply, fund and manage a company car.

What Is a Company Car Allowance?

A car allowance is a cash benefit type of scheme that a business can offer to their employees to help with the cost of funding a vehicle they use for business travel.

It will usually be added to your annual salary amount but paid monthly to help spread the cost to the business and allow better fund management for drivers, especially if they are funding the vehicle through a finance agreement.

With a car allowance you can decide on how the funds are spent but the most common uses are:

  • To make payments towards an existing vehicle lease or finance agreement
  • For maintenance and repairs on an existing vehicle used for work purposes
  • To take out a finance lease or agreement on a new vehicle
  • To retrospectively offset the cost of buying a new vehicle in full

A car allowance gives you the freedom to spend the money as you want, looking at other finance and vehicle options than you might be offered with a company car.

How Do Company Car Allowances Work?

As mentioned above most companies choose to split the agreed allowance into twelve payments and include these with your regular monthly paycheques, but if you are considering taking a car allowance then you should check the payment schedule with your employer.

Once you receive the money it is yours to spend as you wish on a vehicle that you use for work purposes.

No matter how you choose to fund the vehicle it will be in your name and so you will be responsible for the vehicle maintenance, upkeep and payments of any finance agreement you enter into. This will include arranging and paying for:

  • MOT
  • Servicing
  • Maintenance
  • Repairs
  • Insurance
  • Regular payments for finance agreements
  • Any end of agreement charges such as early termination fees if you leave earlier, or excess mileage or damage charges

You will also be responsible for the cost of fuel if you do not have a fuel card or an electric vehicle.


Company Car Allowances and Tax

For tax purposes a car allowance is counted as a cash benefit and is taxed with your salary in line with your personal income tax bracket. As it is grouped together with your salary you will also pay national insurance contributions on the cash allowance.

This is something to consider if you’re in a higher tax band already or are close to the higher tax band as the allowance may push you into the next tax rate.

However, you will not have to pay company car tax, a benefit in kind tax, as you would with a company supplied car.

Benefits of Company Car Allowance

We’ve already mentioned some of these benefits but think it’s important for you to see all the benefits a car allowance offers in one place.

A company car scheme gives you:

  • Freedom to choose whatever car you want without restriction
  • Flexibility to pick the best finance method for you
  • Continued use of the vehicle even if you change employer
  • If purchased, then also the resale funds will be yours when changing car
  • If you already own the vehicle the funds for maintaining and repairing it as needed


Considerations with a Company Car Allowance

Though there are some benefits to taking a car allowance there are a few things you need to take into consideration when deciding if it’s the right option for you.

You’ll be the one signing any finance agreement if you decide to do a contract purchase or lease the vehicle. This means that even if you leave your job you will need to continue with payments of the vehicle.

You will also be the one responsible for the running costs of the vehicle which includes:

  • Any maintenance and repair work that’s needed
  • Servicing
  • MOT
  • Road tax (VED)
  • Insurance
  • Any congestion charges, clean air zone charges and low / zero emission zone charges

Another thing to be aware of is that as it’s a cash benefit you will pay national insurance on it as well as income tax based on your personal rate.

What's the Difference Between a Company Car and Car Allowance?

When deciding whether a car allowance is the best option for you and whether you should accept one from your business you should take into account all the points we’ve explored above.

If your company also offers a company car and you have the choice then it will depend on your individual circumstances as to which is the best option for you.

You’ll want to consider:

  • The vehicles you can choose from
  • Your preferred funding method
  • Employer restrictions on a company car
  • Tax implications

Generally, we find that a car allowance works best for drivers who already own a vehicle they can continue to use, have a particular model in mind or would like an asset you can sell at a later date.

Drivers who are in higher tax brackets, or close to being in them, may find even if they meet some of these criteria a company car is better value for them.

You’ll also want to consider that a cash allowance will also need to cover the maintenance, insurance and other costs mentioned above.

What is a Company Car Mileage Allowance?

Company car mileage allowance is a restriction on the mileage you can travel in a company provided / funded vehicle. Restrictions might be put in place to reduce the cost of financing, prevent excessive wear or simply because that's your expected mileage for the year. 

We recommend speaking to your fleet management team to confirm whether there will be a mileage limit on a company car allowance if you are considering one.

For more information on the company car to see whether that could be the better option for you take a look at this guide. or if you would like to know about anything else on car benefits including company car tax, company fuel tax and finding the right car for you then head back to our driver guides homepage.


Contact Wessex Fleet