If your employer offers a company car or a car allowance, you might assume both are straightforward perks. But the reality is more nuanced (and more expensive) than most people realise. Both options come with tax implications that quietly erode their value, and for many UK workers, neither is the most efficient choice available.
This guide breaks down exactly how each option works, what you'll actually pay in tax, and why a growing number of employees are choosing EV salary sacrifice as a smarter, more tax -efficient alternative. Whether you're weighing up a
What is a company car?
A company car is a vehicle provided by your employer for both business and personal use. You don't own it, you don't arrange the finance and in most cases your employer handles insurance, servicing, and maintenance. In return, you pay tax on the benefit - known as Benefit-in-Kind (BiK) tax.
How does a company car work?
The tax you pay on a company car is calculated using a framework set by HMRC. Two key factors determine your BiK:
- The car's P11D value: The list price of the car, including factory options and VAT, but excluding the first registration fee and annual road tax.
- The appropriate percentage: A rate set by HMRC, based on the car's CO₂ emissions. Lower -emission vehicles attract lower rates.
Your taxable BiK is calculated as:
P11D value × appropriate percentage = taxable BiK value
You then pay income tax on that BiK value. For example, a basic -rate taxpayer (20%) with a company car valued at £27,000 and a 30% appropriate percentage would have a BiK value of £8,100 - meaning they'd pay £1,620 per year (£135/month) in extra income tax. This is deducted through PAYE and will appear as an adjustment to your tax code.
The appropriate percentage for petrol and diesel cars can range from around 25% to 37%, depending on CO₂ emissions. Electric vehicles, by contrast, attract a far lower rate - just 3% in 2025–26, rising gradually to 9% by 2029–30. For more on this, see the advantages EVs specifically offer here: electric car company tax benefits.
As for responsibilities: your employer typically covers insurance, servicing, and road tax. You're responsible for fuel costs for private journeys and, in some cases, fuel for all mileage (with a separate fuel benefit - also taxable).
What is a company car allowance?
A car allowance is a regular cash payment from your employer, added on top of your salary, to help you fund a car of your own choice. Unlike a company car, there's no vehicle provided - you source, finance, insure, and maintain the car entirely yourself.
Car allowances typically range from £3,000 to £10,000 per year depending on your role, seniority, and employer policy. In many cases, you'd be expected to use the car for business travel and claim mileage expenses on top.
Is a car allowance a taxable benefit?
Yes - and this catches many people off guard. A car allowance is not treated as a tax -free benefit. It's classified as additional income and is subject to both income tax (PAYE) and National Insurance contributions (NICs). That means if you're a basic-rate taxpayer, you'll lose 20% to income tax plus 8% in employee NICs - a combined 28% deduction from your allowance before you've even started looking for a car.
Some employees incorrectly assume a car allowance is akin to a tax -free expense. It isn't. HMRC treats it the same way it would treat any other pay rise. The question of whether a car allowance is classed as income is answered clearly in the HMRC guidelines - it is.
How does a company car allowance work?
Here's what happens in practice:
- 1. Added to gross pay: Your employer adds the agreed allowance (e.g. £5,400/year) to your gross salary.
- 2. Taxed at source: Income tax and NI are deducted via PAYE. For a basic-rate taxpayer, roughly £1,512 of a £5,400 allowance is lost to tax - leaving £3,888/year (£324/month).
- 3. Employee funds the car: You use the net amount to lease, finance, or purchase a vehicle of your choice.
- 4. You cover all running costs: Insurance, MOT, servicing, tyres, and fuel all come out of your own pocket.
For guidance on typical amounts, see our article: what is a reasonable car allowance.
Company car vs car allowance: Tax and benefits compared
To understand which option works better for you, it helps to see both side by side. The key difference is how each is taxed - and what it leaves you with at the end of the month.
*Example based on a £50,000 salary, basic-rate taxpayer. Individual figures will vary.
Benefits of company cars
- No upfront cost - the employer funds or leases the vehicle
- Employer handles insurance, servicing, and maintenance
- Access to newer models you might not otherwise afford
- Predictable, fixed tax liability through PAYE
- EV company cars are highly tax -efficient - just 3% BiK in 2025–26
Benefits of a car allowance
- Freedom to choose any make, model, and fuel type
- Keep the surplus if your car costs less than the allowance
- You build equity if you buy rather than lease
- Ability to claim approved mileage rates on business journeys (45p/mile for first 10,000 miles)
- Allowance isn't tied to a specific vehicle policy - useful if you already own a suitable car
Example comparison for a £50,000 salary
To illustrate how each option plays out in practice, consider an employee on a £50,000 salary who is a basic -rate (20%) taxpayer.
On paper, the car allowance looks slightly cheaper in tax terms here - but you're also absorbing all running costs yourself. Once insurance (~£600–£1,200/year) and servicing are factored in, the company car can represent better total value for some employees.
What employers should consider
From an employer's perspective, company car schemes carry significant overheads: fleet management, insurance, maintenance contracts, and capital exposure if vehicles depreciate. Car allowances are administratively simpler but mean the employer has no control over what employees drive - which can matter for insurance liability and branding.
Employers also pay Class 1A NICs (15% from April 2025) on the BiK value of company cars - an additional cost per vehicle, per year. For a petrol car with a BiK value of £8,100, that's an extra £1,215/year per employee in employer NICs alone.
Both formats come with meaningful costs and complications. For context on how salary sacrifice compares, see our article on salary sacrifice vs company car. To understand the tax implications in more detail, our salary sacrifice tax guide lays it out clearly.
The smarter third option: EV salary sacrifice
If a company car is taxed as a benefit and a car allowance is taxed as income, what's the alternative? For a growing number of UK employees, the answer is EV salary sacrifice - a scheme that combines the convenience of a company car scheme with the flexibility of a cash benefit, at a significantly lower tax cost.
Under an EV salary sacrifice arrangement, you agree to reduce your gross salary by a fixed monthly amount, which your employer uses to lease an electric car on your behalf. Because the reduction happens before tax, you save on both income tax and National Insurance - straight away, every month.
How it works
Here's the step-by-step:
- 1. Choose your EV: Browse available models through your provider (e.g. loveelectric's car search page)
- 2. Agree the sacrifice: A monthly amount is deducted from your gross salary before tax and NIC are calculated
- 3. Employer leases the car: The vehicle is leased in your employer's name and assigned to you for personal and business use
- 4. You pay BiK tax: Because you're benefiting from a car, a small BiK tax applies - but at just 3% for EVs in 2025–26, this is minimal
- 5. All-inclusive package: Insurance, maintenance, tyres, and breakdown cover are typically included
For a full walkthrough, see our guide: how does salary sacrifice work.
Why EVs make it even more efficient
The key reason EV salary sacrifice is so powerful is the combination of two tax advantages: pre-tax salary sacrifice savings and exceptionally low BiK rates on electric vehicles.
While a petrol company car could attract a BiK rate of 30% or more, a fully electric car is taxed at just 3% in 2025–26, rising to 4% in 2026–27, 5% in 2027–28, 7% in 2028–29, and 9% in 2029–30. Even at 9% (the 2029–30 rate), EVs remain far cheaper to run through salary sacrifice than a comparable petrol or diesel vehicle through a conventional company car scheme.
For employees exploring whether the numbers stack up, our employee tax benefits for EV schemes guide runs through the savings in detail.
Real-world comparison: company car vs car allowance vs EV salary sacrifice
The table below shows how all three options compare for an employee on a £50,000 salary driving an electric car on salary sacrifice versus a petrol car on a company scheme, and taking the equivalent value as a car allowance.
*Based on a 20% taxpayer. A higher -rate taxpayer sacrificing £475/month gross would pay just ~£282/month net - saving over £190 per month compared to taking the same value as a cash allowance. For a personalised figure, use loveelectric's quote calculator..
💡 Example saving: A higher -rate taxpayer taking a £475/month gross sacrifice through loveelectric pays just £282/month net - that's a saving of over £190/month compared to taking the same amount as taxable income.
Employer benefits
EV salary sacrifice isn't just good for employees - it's designed to be cost-neutral for employers. Here's why:
- NIC savings: Employer National Insurance contributions (15% from April 2025) are paid on the employee's gross salary. When salary is sacrificed, the employer's NIC liability reduces.
- Admin-lite: Providers like loveelectric handle the scheme administration, leasing and insurance - there's no internal fleet management required
- ESG and sustainability: Moving your fleet to EVs helps meet corporate sustainability targets and appeals to environmentally conscious candidates
- Retention and recruitment: Access to a new, all-inclusive EV is a tangible, valued benefit - particularly for employees without a company car
Interested in setting up a scheme? Learn more about how it works, here. Employees can also recommend the scheme to their employer, learn more how it works for employees here.
So, which option is right for you?
Here's a quick summary to help you decide:
- Company car: Best for high-mileage drivers who want their employer to handle all vehicle admin. Particularly tax-efficient if the car is fully electric - but less so for petrol or diesel.
- Car allowance: Best for those who want flexibility to choose their own vehicle and can find a car that costs less than the allowance. Be aware that you'll lose around 28% to tax (at basic rate) before you've spent a penny.
- EV salary sacrifice: The strongest all-round option for most employees. It offers the convenience of a company car, the low BiK of an EV, and significant savings on income tax and NI - all in a fully inclusive monthly package.
To see how much you could save with EV salary sacrifice, get a personalised quote here.
If you're also considering the charging side of things, loveelectric's Charge Card offers savings of up to 60% on public and home charging costs. It’s compatible with all major UK networks - including Tesla Superchargers.
Car allowance vs company car FAQs
Can I use a car allowance to lease an electric car?
Yes. A car allowance gives you cash (after tax) that you can use however you choose - including to lease an EV through a personal lease agreement. However, because you'll have already paid income tax and NI on the allowance, your net budget is reduced. An EV salary sacrifice scheme is typically a more tax -efficient way to get the same outcome, because the payments come out of your gross salary before tax.
Do I pay tax on a car allowance in the UK?
Yes. A car allowance is fully taxable as income. It is added to your gross salary and subject to income tax (20% for basic-rate, 40% for higher-rate taxpayers) and employee National Insurance contributions. This is different from a company car, which is taxed as a Benefit-in-Kind rather than as income. You can check current income tax rates on the HMRC income tax rates page.
Is a car allowance classed as income in the UK?
Yes - HMRC classifies a car allowance as earnings, which means it is treated the same as regular pay for tax purposes. It will appear on your payslip as part of your gross salary, and will be taxed accordingly via PAYE. This also means it counts towards your income when assessed for things like mortgage affordability.
What is the best alternative to a company car?
For most UK employees, EV salary sacrifice is the most tax -efficient alternative to a traditional company car. It allows you to drive a new electric vehicle, fully insured and maintained, at a significantly reduced net cost - because payments are made from gross salary before income tax and NI are applied. The BiK rate on EVs is also just 3% in 2025–26, compared to up to 37% for petrol or diesel vehicles. To explore the best salary sacrifice car schemes available in the UK, see our dedicated guide.
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