Many employers offer employees a choice: a company car or a cash car allowance. Getting this decision wrong can cost you thousands in unnecessary tax each year — or leave you under-funded to run a car you actually need.
The answer depends on your tax rate, the CO2 emissions of the car, how many business miles you drive, and — increasingly — whether you would consider an electric vehicle.
This guide explains how both options are taxed in 2026/27, with worked examples for petrol and electric cars, so you can make the right choice for your situation.
For related reading, see our Income Tax guide and Take-Home Pay calculator.
How a Company Car Is Taxed: Benefit in Kind (BIK)
A company car is a taxable Benefit in Kind (BIK). HMRC calculates a taxable value for the car each year, and you pay income tax on that value as if it were extra salary.
The taxable BIK value is calculated as:
List price × CO2 BIK percentage = Taxable BIK value
You then pay income tax on that taxable value at your marginal rate (20%, 40%, or 45%).
List price means the manufacturer’s UK list price when new, including standard accessories and VAT — not the price you (or your employer) actually paid.
2026/27 BIK Percentage Rates by CO2
| CO2 emissions (g/km) | Petrol BIK % | Diesel BIK % |
|---|---|---|
| 0 (fully electric) | 4% | N/A |
| 1–50 (plug-in hybrid, electric range >130mi) | 5% | N/A |
| 1–50 (plug-in hybrid, range 70–129mi) | 8% | N/A |
| 1–50 (plug-in hybrid, range 40–69mi) | 12% | N/A |
| 51–75 | 17% | 21% |
| 76–94 | 19% | 23% |
| 95–99 | 20% | 24% |
| 100–104 | 21% | 25% |
| 105–109 | 22% | 26% |
| 110–114 | 23% | 27% |
| 115–119 | 24% | 28% |
| 120–124 | 25% | 29% |
| 125–129 | 26% | 30% |
| 130–139 | 27% | 31% |
| 140–149 | 29% | 33% |
| 150–159 | 31% | 35% |
| 160–169 | 33% | 37% |
| 170g/km and above | 37% | 37% |
Diesel surcharge: Diesel cars that do not meet the RDE2 emissions standard attract a 4% supplement on top of the CO2 percentage (up to a maximum of 37%). Most diesel cars registered before 2021 carry this surcharge.
The full HMRC company car tax table is available at gov.uk/guidance/company-car-and-car-fuel-benefit.
How a Car Allowance Is Taxed
A cash car allowance is treated as ordinary employment income. It is added to your salary and taxed accordingly:
- Income tax at your marginal rate (20%, 40%, or 45%)
- Employee National Insurance at 8% (earnings between £12,570 and £50,270) or 2% (above £50,270)
- Your employer also pays Class 1 NI at 13.8% on the allowance
| Car allowance | Gross | Tax + NI (basic-rate, ~28%) | Net retained | Tax + NI (higher-rate, ~42%) | Net retained |
|---|---|---|---|---|---|
| £3,000 | £3,000 | £840 | £2,160 | £1,260 | £1,740 |
| £5,000 | £5,000 | £1,400 | £3,600 | £2,100 | £2,900 |
| £6,000 | £6,000 | £1,680 | £4,320 | £2,520 | £3,480 |
| £8,000 | £8,000 | £2,240 | £5,760 | £3,360 | £4,640 |
The net retained amount must then fund your actual car costs — finance or purchase, insurance, servicing, road tax, and fuel for private journeys.
Worked Example: Petrol Car
The scenario: Emma is a higher-rate taxpayer. Her employer offers either a company car or a £6,500 cash car allowance.
The company car on offer is a petrol hatchback with a list price of £28,000 and CO2 emissions of 120g/km (BIK rate: 25%).
Company car option:
- Taxable BIK value: £28,000 × 25% = £7,000
- Emma’s income tax at 40%: £7,000 × 40% = £2,800/year (£233/month)
- Employer Class 1A NI: £7,000 × 13.8% = £966/year
Emma pays £2,800/year in company car tax. She does not pay for insurance, servicing, road tax, or depreciation — all covered by employer.
Car allowance option:
- Gross allowance: £6,500
- Tax and NI at 42% (higher rate + 2% NI): £2,730
- Net retained: £3,770/year (£314/month)
Emma would need to fund a car, insurance, servicing, road tax, and depreciation from £3,770/year net — approximately £314/month. For a modern petrol hatchback, this is tight but may be manageable if she keeps costs low.
Verdict for Emma: At 120g/km and a £28,000 list price, the company car costs her £2,800 in tax, but she gets a fully-maintained car worth around £550/month equivalent. The car allowance net of £3,770 is almost certainly insufficient to fund an equivalent vehicle. Company car wins in this specific scenario.
Worked Example: Electric Vehicle
The scenario: Same Emma, but the company car offer is a £40,000 electric SUV with 0g/km CO2 (BIK rate: 4%).
Company EV option:
- Taxable BIK value: £40,000 × 4% = £1,600
- Emma’s income tax at 40%: £1,600 × 40% = £640/year (£53/month)
- Employer Class 1A NI: £1,600 × 13.8% = £221/year
Emma pays just £640/year — £53/month — in company car tax for a £40,000 vehicle, fully maintained and insured by her employer.
Car allowance comparison: A car allowance would need to be well over £20,000 to allow Emma to privately lease an equivalent electric SUV and cover running costs after tax.
Verdict for Emma: Company EV is overwhelmingly better. This is why so many employers and employees are choosing electric company cars — the low BIK rate makes the tax cost minimal.
Business Mileage: Own Car vs Company Car
Using Your Own Car (Car Allowance Route)
If you take a car allowance and use your own car for business travel, you can claim HMRC’s Approved Mileage Allowance Payment (AMAP) rates from your employer, tax-free:
| Vehicle type | First 10,000 business miles | Over 10,000 business miles |
|---|---|---|
| Car or van | 45p per mile | 25p per mile |
| Motorcycle | 24p per mile | 24p per mile |
| Bicycle | 20p per mile | 20p per mile |
If your employer pays less than the AMAP rate, you can claim Mileage Allowance Relief for the shortfall through self-assessment or a P87 form.
Example: You drive 12,000 business miles per year. Your employer pays 20p/mile. HMRC allows 45p/mile for the first 10,000 and 25p/mile for the next 2,000.
- HMRC allowable: (10,000 × 45p) + (2,000 × 25p) = £4,500 + £500 = £5,000
- Employer paid: 12,000 × 20p = £2,400
- Claimable shortfall: £5,000 − £2,400 = £2,600 tax-free relief
Using a Company Car for Business Miles
If you have a company car, your employer can reimburse you for business fuel using HMRC’s Advisory Fuel Rates (AFR) without triggering a tax charge. These rates are updated quarterly and vary by engine size and fuel type. The current rates are published on the HMRC website.
If your employer pays for all fuel — including private mileage — there is a separate fuel benefit charge. In 2026/27, the fuel benefit multiplier is £28,200. You pay income tax on: £28,200 × the same CO2 BIK percentage as the car. This is almost never worthwhile unless you drive very high private mileage.
Company Car vs Car Allowance: At a Glance
| Factor | Company car | Car allowance |
|---|---|---|
| Tax calculation | List price × CO2 % × income tax rate | Allowance × income tax rate + NI |
| Who pays running costs | Employer (insurance, service, road tax) | Employee |
| Flexibility | Limited to cars employer offers | Choose your own car |
| Mileage for business | Employer refunds fuel at AFR rates | Claim 45p/mile (first 10,000) |
| Electric vehicles | Extremely tax-efficient (4% BIK) | No special advantage |
| High CO2 cars | Expensive — tax can exceed allowance benefit | Preferable if employer offers good allowance |
| NI for employer | Class 1A on BIK value | Class 1 on full allowance |
When Is a Company Car Better?
- You would choose an electric vehicle — the 4% BIK rate makes the tax cost tiny
- The company car is high-spec and would cost far more to fund privately than the tax charge
- Your employer covers all running costs including insurance and servicing
- You drive low private mileage (less fuel benefit risk)
- You are a basic-rate taxpayer with a low-CO2 car (tax charge is modest)
When Is a Car Allowance Better?
- The company car on offer is a high-CO2 petrol or diesel (BIK rate 25%+)
- You are a higher-rate taxpayer and the annual BIK tax exceeds the value you receive
- You prefer to choose your own vehicle
- You already own a suitable car with low running costs
- You drive very high business mileage and can maximise the 45p AMAP rate
The Electric Vehicle Tipping Point
The BIK rates for electric vehicles are rising — from 4% in 2026/27 to 9% by 2029/30. Even so, they will remain dramatically lower than equivalent petrol rates (which typically sit between 20% and 37%). For the foreseeable future, if an electric company car is available and practically suitable, the tax maths almost always favour taking it.
| Tax year | EV BIK rate | Tax on £40,000 EV (40% taxpayer) |
|---|---|---|
| 2026/27 | 4% | £640 |
| 2027/28 | 5% | £800 |
| 2028/29 | 7% | £1,120 |
| 2029/30 | 9% | £1,440 |
Even at 9%, the annual tax on a £40,000 EV is £1,440 — a fraction of what a petrol equivalent at 25% would cost (£4,000 at the same 40% tax rate).
Summary
The right answer depends almost entirely on two things: what car is on offer and whether it is electric.
For petrol and diesel cars with CO2 above 100g/km, a cash car allowance often wins for higher-rate taxpayers — provided the allowance is generous enough to fund a comparable vehicle privately. For electric vehicles, the company car route almost always wins. For basic-rate taxpayers, the BIK tax cost is lower and company cars become more competitive.
Run the numbers for your specific car and tax rate using the HMRC company car tax calculator before making a decision. The difference can easily be worth £2,000–£5,000 per year.
See also: Income Tax 2026/27 | National Insurance Explained | Self-Employment Tax