Many employers offer a choice: take a company car, or receive a cash car allowance. The right answer depends on what car you'd choose and your tax rate.
How Company Cars Are Taxed
A company car is taxed as a Benefit in Kind (BiK). You pay income tax on a percentage of the car's list price, with the percentage depending on CO2 emissions. For 2025/26, electric cars have a BiK rate of just 2%, while petrol cars can be up to 37%.
Electric car example (£40,000 list price)
BiK: 2% × £40,000 = £800 taxable benefit
Tax (40% payer): £320/year or £27/month
You drive a £40,000 car for £27/month in tax.
Petrol car example (£30,000, 130g/km CO2)
BiK: 33% × £30,000 = £9,900 taxable benefit
Tax (40% payer): £3,960/year or £330/month
Plus you don't choose the car.
How Car Allowances Are Taxed
A car allowance is simply added to your salary and taxed as normal income. A £5,000 car allowance for a 40% taxpayer gives you just £2,900 after tax and NI. You then buy, insure, and maintain your own car from this.
The Verdict
Electric company car: Almost always better. The 2% BiK rate makes this spectacularly tax-efficient. If your employer offers an EV salary sacrifice scheme, this is even better.
Petrol/diesel company car: Usually worse than a cash allowance unless it's a very low-emission vehicle.
Cash allowance: Better if you want choice and the company car options are high-emission, or if you already own a car you're happy with.
Calculate your take home pay with or without a car allowance
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