How does a company car allowance work?

A company car is owned/leased and fully maintained by the employer (including insurance, fuel and repairs), but it comes with high Benefit-in-Kind tax for the employee. A car allowance is a taxable addition to salary (average £3,700–£13,700 p.a. in 2025 depending on role) that lets the employee buy or lease their own car, making them responsible for all costs and maintenance whilst usually resulting in simpler finance, lower tax and greater choice for the employee, with the employer bearing far less administration liabilities and cost.

• Company car vs car allowance
• What is a car allowance?
• How does car allowance work?
• Is car allowance taxable?
• Car allowance: frequently asked questions
• Still have questions? Get expert advice

A company car is an attractive company benefit that can help recruit and retain great staff.

For many, having a company vehicle is a vital part of their role. However, providing an employee with a vehicle can present some complications employers should be aware of. There are also several questions employees commonly ask when it comes to company car and car allowance schemes.

In this guide, Croner covers the process of implementing a company car benefit, and what you, as an employer, need to keep in mind when considering whether to offer one.

Need support around how to provide a company car benefit? Contact one of our experts on 01455 858 132 for FREE, same-day assistance. 

Company car vs car allowance

Let's start by covering the difference between providing an employee with a car and a supporting allowance, also known as a car allowance.

Company car

Employers providing company cars to employees must:

• Purchase or lease the car outright through their business.
• Take on the responsibility for repairs, MOTs, and mandatory services.

Employers will also be liable for:

• Insurance.
• Driving costs (fuel and maintenance).
• Reselling the car should the employee have no further use of it.

Car allowance

Employers providing a car allowance to an employee are providing them with the funds to purchase a vehicle. The car does not belong to the company and the responsibility of maintenance falls on the employee.

Another aspect worth consideration when deciding whether to provide a company car vs an allowance is the tax implications. Purchasing a company car typically incurs much heavier tax payments than a car allowance. It is your choice on which approach best fits your business’s needs.

Let's take a closer look at how car allowances work.

What is a car allowance?

A car allowance is a sum you add to an employee’s annual salary. They will then use this money to buy or lease a vehicle.

In this case, the employee will have to source and buy the vehicle themself. As we have explained, they will also be responsible for maintaining and insuring the car, as well as any other monitoring and maintenance expenses.

However, it is worth noting that you can still provide a mileage allowance, in addition to a car allowance if you wish.

How does car allowance work?

You will need to decide the amount you are willing to provide an employee to purchase or lease a vehicle.

A recent survey by Aaron Wallis Sales & Recruitment found that the average car allowance in 2025 (per annum) in the UK is as follows:

• £8,740 to £13,730 for Sales Directors, Commercial Directors, and Business Unit Directors of larger companies.
• £6,660 to £8,740 for Senior Sales Managers and Sales Directors of SMEs.
• £5,000 to £6,660 for Sales Managers.
• £4,370 to £5,000 for Business Development Managers.
• £3,740 to £4,370 for Field Sales Representatives/Area Sales.

Once you have decided on the amount, you will need to include a car allowance clause in the employee's contract of employment. This should clearly state the amount that you will provide and other terms and conditions.

Ensure that the contract clearly states the employee's liability for maintenance, insurance, and other ownership costs.

Once the staff member buys (or leases) a vehicle, they can claim a mileage allowance (but, only if you have provided this benefit). This should cover the cost of fuel.

Is car allowance taxable?

Providing a car allowance comes with tax implications, which employers need to consider.

When you give employees a car allowance, you are adding a portion of funds to their main salary. This portion will then need to be taxed at the regular income tax rate. This is because you pay the allowance as part of your employee’s salary.

It is for this reason that you would not need to use a car allowance tax calculator, as many employers often do. Instead, you can just calculate the employee’s tax as you usually would.

On the other hand, if you provide a company car you may need further assistance in working out the tax implications. In this instance, you can use the government’s calculator, which you can find here.

Car allowance: frequently asked questions

Due to the complex nature of car allowance, and the liability employees take on, they commonly ask the following questions:

1. What is a company car mileage allowance?

Unlike a car allowance, a company car mileage allowance, also known as car fuel allowance, is a reimbursement, rather than a typical ‘allowance.’ Typically, it will also cover the cost of fuel as well as wear and tear.

Car fuel allowance typically means you can claim 45p for the first 10,000 miles and 25p thereafter, tax-free. However, these rates can only be claimed when an employer is reimbursing business miles, not to company car fuel benefits or advisory fuel rates. It is worth referring to the HMRC’s advisory on fuel rates for fuel allowances for further clarification.

2. Can I claim mileage if I get a car allowance?

This is a common question from employees. The answer will depend on the business’s mileage policies prior to agreeing to give the employee either company car fuel allowance, or just an allowance to purchase a vehicle.

3. How does the company car allowance work?

Company car allowance is a sum of money that allows an employee to purchase a vehicle, which they must then maintain as the owner of the vehicle.

Include your allowance entitlement in employment contracts if you offer this. Also, list the staff member’s vehicle responsibilities and liabilities.

Employees should receive this allowance upon employment, and they should be able to select an appropriate vehicle of their choice.

4. Can I use my own car? 

Employees may be able to use their company's car allowance to offset the costs of their own car. In these cases, the car will still belong to the employee, meaning the responsibility for the car will still be the employees. This includes choosing the type of car, insurance, petrol, and maintenance. 

Employees may wish to use one of the following three types of car allowances:

1. A fixed car allowance: this is a set of regular payments (flat rate) and does not consider how many miles the car has been driven. 
2. Reimbursement-based car allowance: this is where employers will require their employees to log their miles driven with the company car and then be reimbursed with a per-mile rate. 
3. Variable car allowance: The amount paid out for this type of allowance is dependent on how many miles the company car is driven in each period. 

5. Is car allowance taxed?

Yes, at your regular income tax rate. However, a company car (not allowance) incurs much higher tax costs than an allowance.

6. Is car allowance part of my salary?

Again, this is an extremely common question asked by employees. The allowance gets added to their annual earnings.

Still have questions? Get expert advice

If you need further advice about car allowance in the UK, speak to one of our expert advisers on 01455 858 132.