Choosing between a company car scheme and a cash allowance is one of the biggest decisions you’ll make when joining a new employer. Get it wrong, and you could be losing hundreds of pounds each year.
The good news? We’ve broken down everything you need to know to make an informed decision.
Whether you’re evaluating a job offer or looking to switch your current arrangement, understanding how company car schemes compare to car allowances is essential. Let’s explore your options and help you figure out which works best for your situation.
What is a Company Car Scheme?
A company car scheme is when your employer provides you with a vehicle for business use (and often personal use too). The employer either owns the car outright, leases it from a company, or finances it themselves. You simply get to drive it, and the employer typically covers insurance, servicing, and maintenance.
The trade-off? You pay Benefit-in-Kind (BIK) tax on the value of this benefit. However, the amount you pay depends heavily on the car’s emissions and list price. This is where company car schemes can become incredibly tax-efficient, especially if your employer offers an electric vehicle.
What is a Car Allowance?
A car allowance is cash given to you by your employer as part of your salary package. You can use it to buy, lease, or maintain your own vehicle. The flexibility sounds great, but here’s the catch: car allowances are taxed as income, meaning you pay both income tax and National Insurance contributions on the full amount.
For a basic-rate taxpayer, this means a £400 monthly allowance leaves you with just £320 net. For higher-rate taxpayers, it’s even worse at £240. This makes car allowances significantly less tax-efficient than company car schemes for most people.
Four Scheme Types Covered
Salary Sacrifice Schemes
This is the most popular option among employees today. You formally agree to take a lower salary in exchange for a car benefit. The genius part? The sacrificed amount isn’t subject to income tax or National Insurance. You only pay BIK tax.
For an electric vehicle, this means a 3% BIK rate in 2025/26. On a £40,000 car, that’s just £1,200 taxable income, equating to £480 annually for a 40% taxpayer. Compare that to a comparable salary allowance, and you’re saving thousands.
Traditional Company Car Schemes (Finance Lease)
Your employer leases the car, and you use it. Maintenance and insurance are typically included. You pay BIK tax on the car’s value, but you don’t bear depreciation costs or unexpected repair bills. This works well if you value simplicity and predictability.
Contract Hire Schemes
Similar to finance leases, but the employer handles all arrangements. The vehicle is returned at lease end. Monthly costs are fixed, making budgeting straightforward. BIK tax still applies, but it’s lower than owning the vehicle outright due to reduced depreciation.
Employee Car Ownership Schemes (ECOS)
Traditionally, employees “owned” their vehicles while the employer managed everything. It’s a clever way to avoid BIK tax. However, from October 2026, most ECOS will be reclassified and taxed as traditional company cars. If you’re considering this route, check your scheme’s specifics carefully.
The EV Factor
Electric vehicles have transformed company car economics completely. In 2025/26, fully electric cars attract just a 3% BIK rate, the lowest available. This means:
- 40% taxpayer on a £40,000 EV: £480/year in company car tax
- 40% taxpayer on a £40,000 petrol car: Over £2,800/year
- Annual saving: More than £2,300
Looking ahead, EV BIK rates are locked in until at least 2028, with a gradual increase to 5% by 2027/28. Even at 5%, electric vehicles remain far more tax-efficient than petrol or diesel alternatives.
If your employer offers company car leasing with electric vehicles, it’s genuinely worth taking seriously. The combination of low emissions, minimal tax, included maintenance, and the latest vehicle technology makes this exceptionally good value.
Choosing the Right Option
Choose a Company Car Scheme (especially salary sacrifice) if:
- You drive 15,000+ business miles annually
- You’re a 40% or higher-rate taxpayer
- You want predictable monthly costs
- You prefer a new car every 3-4 years
- You value hassle-free motoring with included maintenance
- An electric vehicle is available
Choose a Car Allowance if:
- You drive fewer than 10,000 business miles yearly
- You’re a basic-rate (20%) taxpayer
- You already own a suitable vehicle
- You value complete flexibility in vehicle choice
- You prefer ownership rather than leasing
- Your employer includes business mileage reimbursement at 45p per mile
The reality is, for most people, especially those offered an electric car through salary sacrifice, a company car scheme wins hands down. The tax savings alone typically exceed any benefits of a cash allowance.
FAQs
How much is company car tax in 2025/26?
BIK tax ranges from 3% (fully electric) to 37% (high-emission petrol/diesel). Your actual tax depends on the car’s list price, emissions, and your income tax bracket.
Is a company car cheaper than an allowance?
For high-mileage users and those earning above £50,000, yes, particularly with electric vehicles. For low-mileage users earning under £25,000, an allowance might edge ahead.
What happens if I leave my job?
You lose the company car immediately. There’s no ownership transition unless you’ve been using an ECOS scheme.
Can I negotiate a higher allowance instead of a company car?
You can try, but most employers find company cars more cost-effective for them (they save on National Insurance), so they’re unlikely to offer significantly higher cash instead.
In Conclusion
Company car schemes, particularly salary sacrifice options with electric vehicles, offer unbeatable value for most UK employees. The tax savings are substantial, running costs are minimal with modern EVs, and you get a brand-new vehicle regularly.
However, your personal circumstances matter. If you drive infrequently, own a vehicle you love, or need complete flexibility, a car allowance might suit you better; just factor in the tax hit.
The key is running the numbers for your specific situation. Calculate what you’d actually net from a cash allowance after tax, then compare it to the BIK tax you’d pay on a company car. The maths often speak for themselves, particularly in 2025/26 when electric vehicle tax efficiency is at historic highs.