Car Allowance vs Company Car Calculator

Car Allowance Benefits: Cash allowance added to salary, subject to income tax and National Insurance. Provides flexibility to choose any vehicle or use for other purposes. Typical allowances range £3,000-£8,000 annually depending on role and seniority.

Company Car Drawbacks: Benefit-in-kind tax based on list price, CO2 emissions, and fuel type. Electric vehicles pay 2% BIK, hybrids 5-12%, petrol/diesel 20-37%. Higher rate taxpayers pay significant tax on premium vehicles.

Decision Factors: Annual mileage, vehicle preference, tax band, and personal circumstances. High mileage users often benefit from company cars due to fuel and maintenance inclusion. Low mileage or cash-preferring employees favour allowances.

Salary Sacrifice Alternative: Employee sacrifices salary for company car, reducing income tax and NI on sacrificed amount. Can be more tax-efficient than traditional company car schemes, especially for electric vehicles.

Car Allowance Taxation: Treated as additional salary income, subject to full income tax (20%/40%/45%) and National Insurance (12%/2%). No special tax relief available. Employer also pays 13.8% employer NI contributions.

Company Car BIK: Calculated as (list price × BIK percentage × tax rate). Example: £30,000 car with 25% BIK rate costs basic rate taxpayer £1,500 annually (£30,000 × 25% × 20%). Additional rate taxpayers pay £3,375.

Electric Vehicle Incentives: 2% BIK rate for pure electric vehicles makes them highly tax-efficient. Plug-in hybrids with 50+ mile electric range pay 5-8% BIK. Government incentives drive adoption of low-emission vehicles.

Business Use Relief: No mileage allowance when using allowance-funded personal car for business. Company car users can claim mileage for additional business use beyond normal commute.

Used Car Strategy: Buy reliable used vehicle and pocket remaining allowance. £4,000 allowance could fund £15,000 car over 3-4 years while providing £1,000+ annual surplus.

Low-Cost New Cars: Consider budget new cars with long warranties. Dacia, MG, or entry-level models from mainstream brands offer reliability and low running costs.

Personal Contract Purchase (PCP): Lower monthly payments than hire purchase, with guaranteed future value. Typical payments £200-400 monthly for family cars, fitting most allowances comfortably.

Electric Vehicle Consideration: Government grants and low running costs make EVs attractive. Home charging significantly cheaper than petrol, and many employers provide workplace charging.

Salary Sacrifice Schemes: Use allowance for pension contributions or cycle-to-work scheme. Provides tax relief and reduces taxable income more efficiently than cash allowance.

Public Transport: In urban areas with good transport links, season tickets may cost less than car ownership. Remaining allowance becomes tax-efficient salary increase.

Car Sharing/Rental: For occasional users, combination of car sharing (Zipcar, etc.) and rental for longer trips may be more cost-effective than ownership.

Investment Strategy: For those with existing vehicles, invest allowance in ISAs or pensions. £4,000 annual allowance invested at 5% returns becomes £55,000 over 10 years.

Cars (First 10,000 miles): 45p per mile tax-free allowance. Covers fuel, wear and tear, insurance, and depreciation. Based on cost of running representative vehicle.

Cars (Over 10,000 miles): 25p per mile for additional miles. Reduced rate reflects lower per-mile depreciation on higher mileage vehicles.

Motorcycles: 24p per mile regardless of distance. Lower rate reflects reduced running costs compared to cars but higher than bicycles.

Bicycles: 20p per mile for business use. Tax-free and no restriction on annual distance. Encourages environmentally friendly business travel.

Allowance Recipients: Cannot claim mileage allowance when using personal car funded by allowance for business travel. Allowance intended to cover all vehicle-related costs including business use.

Additional Costs: Can claim parking fees, tolls, and congestion charges for business travel. Keep receipts and maintain detailed mileage logs for HMRC compliance.

Home to Work: Normal commuting not claimable as business expense. Temporary workplace rules apply for short-term assignments away from usual base.

Record Keeping: Maintain detailed log of business journeys including date, destination, purpose, and mileage. HMRC may request records during compliance checks.

Depreciation: Largest cost for new cars, typically 40-60% over 3 years. Used cars 3-5 years old offer best value-retention balance. Luxury and premium brands depreciate faster than mainstream models.

Fuel Costs: £1,500-£3,000 annually for 10,000-15,000 miles depending on efficiency and fuel type. Electric vehicles cost £300-600 annually for same mileage with home charging.

Insurance: £400-£1,500 annually depending on vehicle value, driver experience, and location. Business use cover essential for work-related driving, adds 10-20% to premiums.

Maintenance: £300-£800 annually for servicing, MOT, and repairs. New cars under warranty have lower costs. German premium brands typically more expensive to maintain than Japanese/Korean alternatives.

Small Cars (£3,000 allowance): Dacia Sandero, Toyota Aygo, or quality used Volkswagen Polo. Focus on reliability and low running costs rather than features.

Family Cars (£4,000-5,000): Skoda Octavia, Toyota Corolla, or used premium models 3-4 years old. Balance space, efficiency, and build quality.

Executive Cars (£6,000+): BMW 3 Series, Mercedes C-Class, or Tesla Model 3. Consider electric premium models for tax efficiency and image.

Electric Options: MG ZS EV, Nissan Leaf (used), or Tesla Model 3. Government grants and low BIK rates make compelling financial case for many users.