Company Car or Car Allowance
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Compare the employer’s whole-period cost and the employee’s personal position in separate columns. A cash allowance is taxable pay, while a company car can create a taxable benefit and employer National Insurance. Business mileage, vehicle costs, private use and payroll treatment determine the result; no single crossover figure applies to everyone.
Key facts
- For 2026/27, approved mileage for an employee’s own car or van is 55p per mile for the first 10,000 business miles.
- The approved amount uses 25p per business mile above 10,000 in 2026/27; it is not the company-car fuel rate.
- From 1 September 2026, the company-car advisory electric rate for home charging is 7p per mile.
- From 1 September 2026, the company-car advisory electric rate for public charging is 15p per mile; mixed charging needs fair and reasonable apportionment.
- Employer Class 1A NIC on taxable vehicle benefits is 15% for 2026/27. Cash-allowance payroll NIC is a different calculation.
- Zero-emission company-car benefit percentages are 4%, 5%, 7% and 9% for 2026/27 through 2029/30 respectively. These are benefit percentages, not the employee’s income tax rate.
Decide what the employer is offering
This is an employer’s choice between providing a vehicle and paying a taxable cash allowance. It is different from deciding whether an owner-director should fund the same car personally or through their company. The latter involves additional company and personal funding questions covered in the directors guide.
Intelligent Vehicle Finance can help scope the company-vehicle option against the business’s journeys, drivers and operational needs. The employer and payroll adviser need to define the cash option: who qualifies, how the allowance works, what business mileage is paid and which costs remain with the employee.
Use the same period, expected business mileage and practical vehicle requirement for both options. An allowance comparison based on an employee keeping an existing car answers a different question from one that assumes the employee acquires a replacement. State which case is being evaluated.
The comparison
| Input | Company car: employer | Company car: employee | Cash allowance: employer | Cash allowance: employee |
|---|---|---|---|---|
| Company-cost index | Whole-period vehicle, running and tax costs, less actual recoveries and relief | Not the employer-cost total | Gross allowance plus applicable employer payroll NIC and business-mileage payments | Not the employer-cost total |
| Payroll and benefit inputs | Class 1A NIC on the taxable benefit; any other applicable payroll treatment | Taxable car benefit and personal tax position; employee contributions if relevant | Payroll treatment for cash; thresholds, category and other facts | Net allowance after actual payroll deductions |
| Business miles | Company-car business-fuel or electricity reimbursement policy | Records of qualifying journeys and reimbursed costs | Own-car mileage payments under the agreed policy | Approved mileage amount compared with payments received |
| AMAP | Do not apply own-car AMAP to company-car fuel | AMAP is not this car’s reimbursement rule | 55p first 10,000 and 25p thereafter in 2026/27 for income-tax approved amount | Any shortfall relief is a tax calculation, not automatic payment of the shortfall |
| Vehicle running costs | Check maintenance, insurance, energy, tax and return responsibilities | Any employee-paid costs shown separately | Only the costs the employer actually agrees to meet | Personal vehicle funding, insurance, upkeep, energy and residual exposure |
| Driver benefit | Employer NIC is a company cost | Car benefit tax is personal; do not merge into company cost | Ordinary cash allowance treated through payroll | Allowance does not automatically cover all personal vehicle costs |
| Sensitivity | Term, mileage, tax-year path, contractual inclusions | Income tax position, contributions, private availability | Allowance policy, payroll facts, business-mileage volume | Vehicle choice, private miles, charging mix and later sale value |
Build two ledgers before comparing totals
The employer’s company-car ledger includes the actual vehicle costs, running costs it meets, irrecoverable VAT, relevant taxes, employer NIC and the timing of any tax relief. The allowance ledger includes gross taxable cash, applicable employer payroll NIC, agreed business-mileage payments and any other costs the company agrees to carry.
The employee’s ledger starts with the personal tax on the car benefit and any contributions or unreimbursed costs under the company-car option. Under the allowance option, start with cash received after payroll deductions, then deduct the personal vehicle costs the employee must meet. Include business-mileage receipts separately.
Do not add the employee’s car tax to the employer’s cost and call the total company cost. A director may want to see both perspectives together, but the two ledgers should remain visible. Moving a cost to an employee is a change in who pays it, not necessarily a reduction in the total resources used.
For a company-cost index, take the employer’s verified company-car total as the baseline and divide the employer’s allowance total by it. This produces a relative comparison without inventing a lease price. The index is meaningless until both totals include the same period, responsibilities and tax assumptions.
Cash allowance: calculate payroll, do not copy the benefit rate
A round-sum cash allowance is generally added to earnings and handled through payroll. The employee’s net amount depends on their actual tax and National Insurance position. The employer must separately calculate its payroll NIC under the applicable rules, thresholds and employee category.
The 15% Class 1A figure relates to taxable benefits. It is not a shortcut for calculating the full payroll result of a cash allowance, even where a headline employer percentage looks similar. Payroll should model the additional cash alongside existing earnings, not as an isolated payment with invented thresholds.
Where an employee can choose cash instead of a car, ask the tax adviser whether optional-remuneration rules affect the benefit valuation. Do not assume a normal company-car benefit calculation is sufficient for every cash-alternative arrangement. This guide does not offer an employee-benefit scheme or determine its tax design.
Own-car business mileage: a worked tax calculation
Illustration, not a quote: assume an employee uses their own car for 12,000 qualifying business miles during 2026/27. The income-tax approved amount is 10,000 × £0.55 plus 2,000 × £0.25, giving £6,000. This is a mileage tax calculation, not a lease payment, allowance recommendation or customer outcome.
Compare the approved amount with what the employer actually pays for those journeys. It is not a statutory promise that the employer will reimburse that amount. If payments are below the approved amount, any available mileage allowance relief reduces tax according to the employee’s circumstances; it does not give them the whole cash shortfall.
If payments exceed the approved amount, reporting and tax can arise. Ask payroll to deal with National Insurance separately rather than assuming its mileage treatment follows every feature of the income-tax bands. Keep the employer’s policy, approved amount, actual payment and any employee relief in separate fields.
Only qualifying business travel belongs in this calculation. Ordinary commuting and private trips must not simply be included in the business-mileage total. A journey record needs enough information to support its purpose and distance, and the employer should confirm its own claim process.
Company-car electricity: a different calculation
Company-car advisory rates cover fuel or electricity in the circumstances HMRC specifies. They are not a contribution towards buying, insuring and maintaining an employee’s own vehicle. Applying the own-car approved mileage figure to company-car electricity would compare different things.
Illustration, not a quote: for 1,000 qualifying company-car business miles at the current advisory electric rates, all-home charging gives £70 and all-public charging gives £150. These are tax-only reimbursement illustrations using rates from 1 September 2026, not electricity-bill forecasts or promised employer payments.
For mixed home and public charging, apportion the mileage fairly and reasonably according to how much charging occurs at each location. HMRC permits a higher amount where the higher cost per mile can be evidenced. Do not assume the public advisory figure equals every charger’s actual cost.
HMRC reviews advisory fuel rates periodically and allows the previous rates for up to one month after a change. Use the rate applying to the relevant reimbursement period and retain the supporting method. A whole-period employer comparison must allow for later rate changes rather than fixing today’s figures for the entire arrangement.
Employer NIC and driver tax need separate lines
Illustration, not a quote: an assumed £1,000 taxable vehicle benefit in 2026/27 produces £150 employer Class 1A NIC at 15%. The employee’s personal tax is a separate calculation using that benefit and their own tax position. The £1,000 input is an illustrative taxable benefit, not a vehicle value or rental.
For an ordinary company-car benefit calculation, the car’s P11D value and applicable benefit percentage are central inputs, with adjustments where relevant. A zero-emission car’s published benefit path is 4%, 5%, 7% and 9% across 2026/27 to 2029/30. A car kept across those years needs a year-by-year calculation.
Private availability is relevant to the benefit rules. A claim that most miles are for business does not by itself mean there is no taxable car benefit. Private fuel, employee payments and cash-alternative terms can add further questions for the adviser. Keep those assumptions visible rather than hiding them in one total.
Test the factors most likely to change the result
Run the comparison with the expected mileage, then with a plausible lower and higher business-mileage case. Keep private mileage separate: it affects energy use, wear and the personal position but is not automatically qualifying business mileage. Identify who bears the cost if mileage changes.
Check whether the employee would use an existing car or acquire another one, who carries repair and replacement risk, and whether business-use insurance and vehicle suitability meet the employer’s requirements. A cash allowance does not automatically transfer all employer responsibilities for work travel.
Test charging access, running-cost inclusions and the period of use. A low personal cash outlay in the first year can hide later replacement costs. Equally, a company-car comparison that assumes every cost is included in hire can miss contractual exclusions and end-of-term charges. Use actual terms before selecting an option.
What to take to your accountant and payroll adviser
Bring the company-vehicle specification and contractual scope, expected business and private miles, cash-allowance policy, employee tax and payroll facts, and responsibility for insurance, maintenance and energy. Include any employee contribution or right to choose cash instead of the car.
Ask for employer and employee results separately, with the year-by-year benefit calculation, employer NIC, actual mileage payments and relief assumptions identified. Ask which assumptions would reverse the result and which depend on future rules or a later vehicle sale.
Tell IVF the common vehicle requirement and mileage basis so that the company-car quotation can be compared with that reviewed policy. This is general information, not tax, legal or accounting advice. Your accountant and payroll adviser should calculate your own figures before an employer makes a decision.
Useful next steps
Your questions answered
What should an employer compare before choosing a car allowance?
Compare the same period and practical vehicle requirement, including company costs, employer NIC, mileage payments and the employee’s personal position. Define who meets each running cost before comparing totals.
Why are company and employee costs separate?
They belong to different people and follow different tax rules. A cost moved from the employer to an employee is not automatically a saving in the combined position.
How is a cash allowance treated through payroll?
A round-sum cash allowance is generally added to earnings and handled through payroll. The employee’s deductions and employer’s payroll NIC need calculations using their actual circumstances.
Which mileage rates apply to an employee's own car?
For 2026/27, the income-tax approved amount for an employee’s own car or van uses 55p per qualifying business mile for the first 10,000 miles and 25p thereafter. Actual employer payments may differ.
Why are company-car fuel rates different from AMAP?
Company-car advisory rates concern fuel or electricity in specified circumstances. Own-car mileage allowances address a different arrangement and must not be used as the company-car fuel rate.
What changes when annual business mileage exceeds 10,000?
For the income-tax approved amount, miles above 10,000 use 25p in 2026/27. Calculate actual employer payments and any relief separately, and ask payroll to check National Insurance treatment.
Where does employer National Insurance enter the comparison?
Class 1A NIC on a taxable company-car benefit is an employer cost, at 15% in 2026/27. Cash allowances instead need the applicable payroll NIC calculation.
How does private mileage affect the decision?
Private miles affect running costs and must stay separate from qualifying business mileage. Private availability can also affect a company-car benefit; a high business-use share does not itself remove it.
Can one crossover figure apply to every director?
No. The result depends on the vehicle, period, payroll and personal tax facts, actual mileage payments, running costs and any cash-alternative rules.
What evidence should the accountant and IVF review together?
Bring the vehicle requirement and contract scope, mileage split, allowance policy, payroll facts, contributions and cost responsibilities. Have the accountant review the separate employer and employee calculations.
Primary sources
Sources checked 22 September 2026. Read the current guidance and ask your adviser to apply it to your circumstances.
- Mileage Allowance Payments (480: Appendix 3)
- Advisory fuel rates
- Rates and thresholds for employers 2026 to 2027
- Expenses and benefits: cash sum payments to employees: Round sum allowances
- CO2 emissions tables of rates
- Taxation of company cars: The appropriate percentage for tax years 2028 to 2029 and 2029 to 2030
- EIM44060 - Optional remuneration arrangements: cars with CO2 emissions of 75 grams or less per kilometre
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Editorial responsibility: Stacey Smith, Brand Director, Intelligent Vehicle Finance.
Last updated: September 2026