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How Does Company Car Allowance Work

Written by Nationwide Cars on 28 Aug 2019, 4:03 p.m.

How Does Company Car Allowance Work

Many businesses offer company cars and it’s a great perk that helps not only recruit fresh talent but retain high-quality staff. There are some job roles where a company car is a necessity - without a company vehicle, they would not be able to do their job. While a company car is a fantastic perk, it has its own complications and challenges. From offering a car or a car allowance to giving colleagues extra salary instead of a vehicle, there’s a lot to consider. 

The experts at Nationwide Cars have excellent experience in helping business owners choose company cars for their colleagues, and aid employees find a car that’s right for them. We’ve broken down the process of company car allowance so that you can understand your company car policy with ease, and make the most of it. 

What is a car allowance?

A car allowance is a sum of money that’s been added onto an employee’s annual salary. With this money, they can purchase or lease a car.  Some businesses may also offer a mileage allowance alongside a vehicle allowance. 

How does a car allowance work? 

The first step is deciding on how much money the employer gives to the employees for their cars. A survey had found that the average UK car allowance is: 

  • £10,300 for company heads (directors & c-suite individuals).

  • £8,200 for senior managers.

  • £6,500 for middle managers.

  • £5,200 for sales representatives.

  • £4,600 for professionals.


Once this is done, the car allowance clause must be added to the employee’s contract. This should cover: 

  • How much monetary allowance is given 

  • Responsibility, insurance and maintenance fall on the employee.

  • Mileage allowance. 

  • The cost of fuel as well as wear and tear.

Can you tax car allowance?

When you offer a car allowance,  the car allowance tax is taken from the employee’s earnings at the normal income rate. This happens because the allowance is being paid as part of the colleague’s salary. 

What is a company car?

A company car is simply a car a business provides to its employees for both business and sometimes personal use. If you’re able to use your company car for personal transport, you’ll need BIK (Benefit in Kind) tax. This is because the car is a perk that’s being paid for by the employer, on top of a salary. Because of this, you benefit financially. 

How is BIK tax calculated? 

BIK tax is based on the following:

  • The age of the car

  • The fuel type

  • The CO2 emissions

  • The engine size

  • The list price of the car

The amount an employee will pay also depends on the personal income tax bracket they’re in. For example, if you pay 20% tax, you’ll pay 20% of the taxable portion of the car’s P11D value.

If you supply a company car, you are responsible for the following: 

  • Car insurance

  • Driving costs

  • Maintenance 

Company car vs company car allowance

Pros of company cars

Pros of company car allowance

Maintenance, car services and MOTs are covered by the employer. 


Employers should cover insurance

You can choose the vehicle


You keep the car if you leave the business 


You own the car and can modify it


Tax costs are lower

Cons of company cars

Cons of company car allowance

Limited choice over the type of car 


Heavy tax payments


The vehicle belongs to the company


Not allowed to modify or upgrade your vehicle

You’re responsible for the maintenance, MOT and insurance 


Travel distance and expenses are your responsibility 

Here at Nationwide Cars, we deliver our customers free and impartial advice to ensure you choose the perfect car. Contact us today and we can help get you back on the road in no time.