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How Does a Company Car Allowance Work in the UK

Written by, Marija Petkova

Updated September, 7, 2022

When searching for a UK job, you’d do well to find one that comes with a company car or car allowance as it’s a great perk to cover your transportation costs.

But how does a company car allowance work, though?

Keep reading to find out!

What Is a Company Car Allowance Policy?

You’ve heard about company car allowance in the UK, but you are unsure what it is exactly and how does it work?

In essence, а car allowance is a unique benefit offered by some employers in the form of funds added to an employee’s annual paycheck to cover their transportation costs.

In most cases, workers can use the money either for leasing purposes, to purchase a vehicle outright, or pay for the maintenance costs of an existing car.

The allowance is typically paid monthly or yearly, and the amount varies based on vehicle type, miles travelled, and more.

If you are planning to use your company’s car allowance, consider a few things:

  • Always check with the company you are applying with or work for to see whether or not they offer this benefit and the requirements you have to meet to use it;
  • You will be responsible for paying your company car allowance tax in most cases; therefore, you have to adjust your budget accordingly;
  • Remember that a company car allowance is not the same as a company car, and you will still have to cover the operation and maintenance costs for your own vehicle.

Note: Your employer might also limit your car choices based on age, CO2 emissions, number of seats, fuel efficiency, etc.

How Does It Work Exactly?

While the employer typically determines the rights and responsibilities of the parties involved in company car allowance schemes, some general rules still apply.

For instance, employees usually have the right to use the company car allowance to purchase or lease a vehicle of their choice unless otherwise restricted by the employer.

On the other hand, employers should provide a sufficient car allowance in their workers’ compensation packages that covers all costs of purchasing or leasing a specific vehicle.

Company Car Rules for Employees in the UK

If you have recently landed a job in the UK that includes the benefits of a company car, you will generally have to follow a few rules:

  • You must be a licensed driver with the proper insurance coverage, maybe even commercial travelling car insurance;
  • You are required to service your car regularly, so it complies with UK laws;
  • You may be asked to submit mileage logs on a regular basis;
  • You must respect and strictly follow all traffic rules as a company representative.

Note: If you were issued a company car, you would be allowed to use it for private social purposes, but you won’t be able to use it for the business purposes of other companies.

Company Car or Car Allowance?

In simple terms, while a company car is an asset provided to workers who require one, a car allowance is a lump sum paid out to employees looking to lease or buy a new vehicle.

If you could choose one or the other and wonder about their pros and cons, you should base your choice depending on your circumstances and your current needs.

For example, with a company car, you get lower BiK taxes, no depreciation or other unexpected costs, and you will drive a relatively new car without any financial obligations.

Car allowances, on the other hand, give you the freedom to choose your own vehicle, the option to lease or buy it, and the potential for a future profit once you sell the car.

What Are the Benefits of a Company Car Allowance?

Since buying a car with a car allowance in the UK is the preferred choice for most employees, we look at its pros and cons in the table below:

For Employers:For Employees:
A company car allowance can help attract and retain top talent;
It can be used as a tool to reward employees for their performance;
It can help decrease the cost of business travel expenses;
It can reduce the company’s overall transportation costs.
Greater flexibility and freedom when it comes to choosing a vehicle;
It can boost employee morale;
It can lead to future profits as the employee owns the car;
It can improve employee productivity by making it easier to commute.

Even if you benefit from an average car allowance in the UK, remember that you would be responsible for the vehicle running costs, MOT fees, repairs and insurance costs and legal covers resulting from car accidents, and more. 

Is My Company Car Allowance Taxable?

If you are concerned about your company car allowance tax implications, there’s no need to worry, as even if you were to have any tax fees to pay, they would be objectively reasonable. Moreover, you might not be taxed at all if the allowance is too small or you don’t buy a car.

If this allocation is simply added to your regular salary, it’s considered taxable income. 

On the other hand, if you are given a separate payment to purchase a car, you might have to pay tax on the car value, which may be reduced for business purchases.

Bottom Line

Companies that offer a company car allowance in the UK will certainly attract the best talent in the industry as it boosts the employees’ morale in addition to helping them commute on time. However, when looking for such a job, remember to consider the few drawbacks of a car allowance policy, as you might be better off with a higher salary in the end.

Frequently Asked Questions And Their Answers

What is a company car allowance mileage?

Certain companies also offer to pay back an employee’s mileage costs to a certain degree. Employers that provide this option set the limits of their car allowance mileage based on the shortest route between the worker’s home and their place of work.

Is a car allowance part of my salary?

If you’re wondering ‘How does a company car allowance work?’, note that it might be included in your yearly salary, or even paid out monthly as separate payments. Ultimately, the employer decides if and how to disburse the funds.

My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.