Car Allowance Guide

So, you have the option of a car allowance, or maybe you have seen a car allowance mentioned in a job advert you are interested in. Let's walk through exactly what a car allowance is, so that you know exactly what it means...

What Is a Car Allowance?

Simply put, a car allowance is extra money your employer adds to your salary to help cover your car costs. Instead of giving you an actual company car, they're essentially giving you cash to sort it yourself.

The great thing about this is that you've got the freedom to get whatever car you want; you might even already have a car, in which case it's just extra cash for you, although you may need to maintain it better than you usually would if you're using it for work. You may also need to update your insurance policy if you are now using your car for business purposes.

But here's the catch that many people don't realise until it's too late: that car allowance counts as income, which means the taxman will want his share before you get yours.

What Does Car Allowance Mean?

A car allowance is typically paid monthly and added to your salary. This means it's subject to income tax and National Insurance contributions, just like your regular earnings. For example, if you're in the 40% tax bracket and receive an £8,000 annual allowance, you'll only see £4,800 after tax.

Employers may also reimburse you for business mileage. According to HMRC's approved mileage rates, you can claim 45p per mile for the first 10,000 miles in a tax year and 25p per mile thereafter. These reimbursements are tax-free and help cover fuel costs and wear and tear on your vehicle.

Car Allowance vs. Company Car

Imagine you've been offered either a £5,000 car allowance or a company car. Let's see what works out better for you.

With a car allowance, you pick the car, handle the maintenance, and decide what happens when you're ready for a change. Plus, no company car tax, hurray!

A company car, on the other hand, is provided by your employer (you might still have some choice depending on how the business sources company cars), and they cover maintenance and other responsibilities. When something goes wrong, it's their problem, not yours. However, you will need to pay Benefit-in-Kind (BiK) tax, which can be substantial depending on the vehicle's value and CO₂ emissions.

What Can You Do with Your Car Allowance?

Once you've got your car allowance sorted, you've got several ways to use it:

Lease a Car: Personal leasing is popular among those with a car allowance. It works similarly to a company car without the BiK tax. Monthly rentals are typically less than financing, and you don't need to worry about reselling or depreciation. Plus, road tax, breakdown cover, and warranty are included, servicing and tyres too if you opt for a maintenance package.

Finance a Car: If you prefer to own the car eventually, financing options like PCP (Personal Contract Purchase) or HP (Hire Purchase) might be suitable. With PCP, you pay a deposit, monthly payments for a term (usually 4 years), and decide at the end whether to buy the car. HP involves paying off the entire vehicle over the agreed term, resulting in ownership at the end.

Buy Outright: If you've got the cash, you could buy a car outright and treat your allowance as extra income. However, this is less common due to depreciation.

Use Your Current Car: If your current car is suitable, you could pocket the cash and continue using it. Consider the increased depreciation and maintenance costs resulting from higher usage.

Is Car Allowance Taxable?

As mentioned, a car allowance is treated as income, so you'll pay income tax and National Insurance on it. This reduces the net amount you receive. Additionally, you'll be responsible for all vehicle-related expenses, including fuel costs, maintenance, insurance, and any business travel expenses not covered by mileage reimbursements.

In contrast, a company car is considered a taxable benefit, and you'll pay Benefit-in-Kind (BiK) tax based on the car's value and CO₂ emissions. However, the employer typically covers maintenance and insurance costs.

Which Option Makes Sense for You?

A car allowance might be best if:

• You have your heart set on a specific car that you can't get as a company car.

• You like the freedom to change your cars on your terms.

• You don't mind handling the admin side like insurance, maintenance, etc.

• You're happy for it to be taxed.

• ou're just going to use your current car and pocket the cash.

A company car could be better if:

• You want a hassle-free option with no maintenance or insurance worries.

• You're interested in a low-emission or electric vehicle (BiK is likely to be lower than the allowance tax).

• You don't want to deal with selling your car later.

• The simplicity of having everything taken care of appeals to you.

Is a Car Allowance Worth It?

Car allowances can be a fantastic perk if you use them wisely, but they're not free money. Remember to always factor in tax and all the costs of running a car before you make any decisions.

If you're still weighing up whether to lease, finance, or buy with your allowance, why not drop us a line? We help people navigate these decisions every day, and we'd be happy to look at your specific circumstances to find the best solution for you.

For the most current information on tax rates and allowances, please refer to official HMRC resources or consult with a tax professional.

Frequently Asked Questions