A practical walkthrough for business owners and professionals weighing up the two options — with real numbers, not guesswork.
If you’re a director, senior manager, or consultant, there’s a good chance you face this question every few years: take the company car, or take the cash instead?
On paper it looks simple. In practice, the company car vs car allowance decision depends on your tax band, what you plan to drive, and — crucially — whether you own the company.
Here’s how to work it out for the 2026/27 tax year, with worked examples you can adapt to your own situation.
The Basic Mechanics
Company Car
Your employer (or your own limited company) provides the vehicle. You pay Benefit-in-Kind (BIK) tax on the value HMRC assigns to that benefit — based on the car’s official list price and how much CO2 it pumps out.
In simple terms:
Car’s list price × HMRC’s CO2 percentage × your tax rate = what you pay each year
Here are the HMRC percentages for 2026/27, based on what the car emits:
| Vehicle type | BIK rate |
|---|---|
| Fully electric (0g/km) | 4% |
| Plug-in hybrid, 40–69 mile electric range | 10% |
| Plug-in hybrid, under 30 mile electric range | 16% |
| Petrol, 100–104g/km | 26% |
| Petrol, 130–134g/km | 32% |
| Diesel, 130–134g/km (non-RDE2) | 36% |
| Petrol/diesel, 160g/km+ | 37% |
With a company car, your employer normally covers insurance, maintenance, servicing, and breakdown cover. The car sits on their books, not yours.
Car Allowance
Instead of a car, you get a fixed monthly or annual cash payment added to your salary. The catch? It’s taxed exactly like your wages — income tax and National Insurance both apply before you see a penny.
From what’s left, you fund everything: the car itself, insurance, servicing, fuel, the works. On the plus side, you can claim business mileage back from HMRC at 45p per mile for the first 10,000 miles (25p after that), tax-free.
Worked Example 1: Company Car vs Car Allowance for an Employed Professional
James earns £65,000 and falls in the higher-rate tax band. His employer offers either a company car or a £7,200 annual car allowance.
He’s looking at a petrol saloon with an official list price of £38,000 (what HMRC calls the P11D value) and CO2 emissions of 128g/km — putting it in the 31% BIK band.
If he takes the car allowance
| Annual | |
|---|---|
| Gross allowance | £7,200 |
| Income tax (40%) | −£2,880 |
| Employee NI (2%)* | −£144 |
| What actually lands in his bank | £4,176 |
*Only 2% NI applies on earnings above £50,270.
From that £4,176 — roughly £348 a month — James needs to cover:
| Monthly | |
|---|---|
| PCP finance on a £38k car | £460 |
| Insurance | £75 |
| Maintenance & servicing | £55 |
| Total monthly cost | £590 |
Result: James is £242 a month out of pocket — nearly £2,900 a year more than the allowance covers. And that’s before fuel.
If he takes the company car
| Car’s list price (P11D) | £38,000 |
| BIK rate | 31% |
| Value HMRC counts as income | £11,780 |
| Tax at 40% | £4,712/year |
That’s £393 a month. No insurance to arrange, no servicing bills, no MOT surprises — and no worry about the car losing value.
Result: The company car costs James £393/month vs £590/month doing it himself. He’s roughly £2,400 a year better off.
Key takeaway: If you’re a higher-rate taxpayer driving a petrol or diesel car, the company car usually wins on the numbers — before you even think about the hassle you’re avoiding.
Worked Example 2: Limited Company Director
Sarah runs her own consultancy through a limited company turning over £150,000 a year (25% corporation tax rate). She mixes salary and dividends, putting her in the higher-rate tax band.
She’s choosing between two cars, both bought through the company:
| Petrol exec saloon | Electric saloon | |
|---|---|---|
| List price | £48,000 | £48,000 |
| CO2 | 130g/km | 0g/km |
| BIK rate | 32% | 4% |
What Sarah pays personally
| Petrol | Electric | |
|---|---|---|
| Value HMRC counts as income | £15,360 | £1,920 |
| Income tax at 40% | £6,144/year | £768/year |
| Employer’s NI (13.8%) | £2,120 | £265 |
Going electric saves Sarah £5,376 a year in personal tax. Her company also saves £1,855 in National Insurance.
The company tax saving most directors miss
Here’s where owning the company changes the maths completely. If your company buys a brand-new electric car, you can deduct the full purchase price from your company’s taxable profits in year one. HMRC calls this the 100% First Year Allowance — and it’s available on new zero-emission cars until 31 March 2027.
A petrol or diesel car, by contrast, gets written down slowly — only 18% of its value each year.
| Petrol (slow write-off) | EV (full write-off) | |
|---|---|---|
| Year 1 deduction | £8,640 | £48,000 |
| Year 1 corporation tax saved (25%) | £2,160 | £12,000 |
The electric car generates nearly £10,000 more in corporation tax relief in year one alone.
What it actually costs — year one, combined
| Petrol | Electric | |
|---|---|---|
| Sarah’s personal BIK tax | £6,144 | £768 |
| Company corporation tax saved | −£2,160 | −£12,000 |
| Company NI cost | £2,120 | £265 |
| Net combined position | £6,104 cost | £10,967 saving |
The EV effectively puts nearly £11,000 back into the company in year one. The petrol car costs Sarah over £6,000 personally.
Heads up: The First Year Allowance window closes 31 March 2027. Order lead times on popular electric models run 3–6 months. If this route appeals, don’t hang about.
The 5-Question Shortcut
No spreadsheet? No problem. Run through these:
| # | Question | What it tells you |
|---|---|---|
| 1 | Are you a 40% or 45% taxpayer? | Car allowance shrinks by nearly half before you’ve spent a penny. The higher your bracket, the more a company car makes sense. |
| 2 | Could an EV or low-emission plug-in hybrid work for you? | At 4% BIK, a £50,000 EV costs a 40% taxpayer about £800 a year. A petrol equivalent at 32% costs around £6,400. That gap covers a lot of charging. |
| 3 | Do you own the company? | Buying a new EV through your company can wipe £10k–£20k off your corporation tax bill in one go. No car allowance can do that. But you need to buy before April 2027. |
| 4 | Certainty or flexibility — which matters more? | Company car: fixed monthly cost, no surprises, no admin. Allowance: choose any car you like, but you carry every risk. |
| 5 | How many business miles do you actually drive? | Lots of business miles makes the tax-free mileage claim on a personal car attractive. But if most of your driving is commuting and personal, the company car’s all-in package wins. |
Where a Broker Changes the Equation
This analysis assumes you already know exactly which car you want and where to find it at the right price. In reality, that’s half the battle — especially if you’re busy running a business and don’t follow the car market.
Whether you go company car or personal purchase, the vehicle itself needs sourcing, pricing, and negotiating. A good broker who understands both the tax landscape and the dealer network can:
- Find models that land in the right tax band and suit how you actually drive
- Source the best real-world price (your BIK is based on list price — overpaying hurts twice)
- Navigate factory order lead times against tax deadlines like the FYA window
- Remove the showroom hassle entirely — no salespeople, no haggling, no jargon
The decision between company car and car allowance is a tax conversation. The decision about which car is a sourcing conversation. Getting both right is where the real money lives.
This article reflects 2026/27 tax year rates as confirmed by HMRC. It does not constitute financial advice — always confirm figures with your accountant before making a commitment. Tax treatment depends on individual circumstances and may change.
