Cash Allowance vs Company Car UK 2026/27 | Which Is Better?

When an employer offers a choice between a cash car allowance and a company car, the numbers rarely look the same on paper — because the two options are taxed differently. A cash allowance is normally employment earnings subject to Income Tax and, where applicable, employee National Insurance, while a company car is taxed through Benefit-in-Kind (BIK) on its adjusted cash-equivalent value and does not create employee Class 1 NI on the benefit itself. For 2026/27, a zero-emission car has a 4% BIK percentage; petrol and diesel percentages depend on the car’s CO₂ figure and can reach 37%.

Your tax bracket, mileage and whether you can charge at home decide the winner. Compare your own figures with the Company Car BIK Calculator→, and model the salary impact of a cash allowance with the Salary Calculator→.

How Each Option Is Taxed

A £6,000 cash allowance costs a basic-rate taxpayer £1,200 in income tax and £480 in employee NI, leaving £4,320. For a higher-rate taxpayer the same allowance leaves just £3,480 — before a pound is spent on insurance, maintenance, VED or the car itself. The company car, by contrast, converts a fixed BIK percentage into a taxable benefit that is often far below the true value of the car, and none of it is subject to employee NI.

The BIK Calculation for 2026/27

Taxable benefit is broadly the P11D/list value × the appropriate BIK percentage, subject to adjustments such as employee capital contributions, availability and private-use payments; tax is the resulting benefit × your marginal rate. Zero-emission cars pay 4% for 2026/27; petrol and diesel cars pay from 17% to 37% depending on CO₂, with the applicable diesel rules and cap.

For petrol and diesel, the BIK tax can exceed the cost of a personal lease — the "benefit waste" problem. A £42,000 petrol car at 31% BIK costs a 40% taxpayer £5,208 a year in tax alone, often more than leasing the same car privately, while the same driver pays £800 a year for an EV that includes insurance, maintenance and breakdown cover.

Salary Sacrifice and the OpRA Rules

Salary sacrifice for an electric car works by swapping gross salary for the lease cost, which can cut Income Tax and employee NI on the sacrificed amount while the employer may save secondary NI; whether any saving is shared depends on the scheme. For cars with CO₂ above 75 g/km, the Optional Remuneration Arrangement (OpRA) rules generally compare the modified cash equivalent with the salary foregone, so the higher amount is taxed. Cars at 75 g/km or below are excluded from that comparison, subject to the detailed rules. A £500 monthly sacrifice for an EV at 4% BIK may save a higher-rate taxpayer about £2,500 a year before the BIK charge, but the actual result depends on payroll, pension and scheme terms.

When Each Option Wins

Choose the company car if you are a higher or additional-rate taxpayer, want an EV (especially through salary sacrifice), drive high business mileage, or value predictable costs where the employer package includes insurance and maintenance. Choose the cash allowance if you are a basic-rate taxpayer, prefer a budget or used car under £20,000, already own a car you are happy with, or drive so little that the BIK tax is not worth the benefit.

• Salary sacrifice changes the maths — with an EV scheme you give up gross salary for the lease, saving income tax and NI on the sacrificed amount, paying only 4% BIK on top.
• The employer angle — an allowance may create secondary NI above the applicable threshold, while a company car creates 15% Class 1A on the BIK value; any employer saving passed to you is a scheme decision.
• Fuel benefit traps — if the employer pays for all private fuel in a petrol or diesel car, the fuel benefit charge adds £29,200 × BIK% to your taxable income, worth avoiding entirely.

Check the contract and the car data

Before doing the arithmetic, ask for the written policy and the exact vehicle quotation. Confirm whether the allowance is contractual salary, a non-pensionable allowance, or a payment that stops when you opt into the car scheme. Check whether it is paid monthly or only for the months in which you are eligible. A part-year company car and a full-year allowance are not comparable without adjusting both to the same dates.

For the company car, record the P11D value, CO₂ figure, fuel type, transmission where relevant to the employer's records, date the car is first available and whether the vehicle is new, used or a replacement. The relevant list value is not simply the monthly lease price. Accessories and employee capital contributions can affect the cash equivalent, while private-use payments and periods when the car is unavailable may affect the final figure. Ask payroll which data it will report rather than copying a dealer's monthly quotation into the calculator.

The employer's package should also identify insurance, maintenance, tyres, breakdown assistance, road tax, charging and fuel. “Fully maintained” does not necessarily mean that every tyre, excess or charging cost is covered. A cash allowance can be the better fit if you already have a suitable car, but it can be poor value if you must finance a new vehicle and absorb depreciation. Model the cash option over the full contract period, including the deposit, finance or lease payments, servicing, repairs, insurance and expected resale value.

Mileage, private use and fuel

Business mileage affects the practical value of a company car, but it does not convert private journeys into business travel. Keep business-mileage evidence and use the employer's policy for mileage reimbursement. A long commute is normally a private journey for these calculations. If your annual business travel is uncertain, run a low, central and high case rather than choosing the band that gives the preferred answer.

Private fuel is a separate decision. If the employer provides petrol or diesel for private use, the fuel benefit charge uses the statutory multiplier and the car's appropriate percentage; it is not the same as adding the pump price to the BIK calculation. If you reimburse all private fuel under the employer's process, confirm how that is recorded. For an electric car, do not assume that home charging, workplace charging and public charging have identical tax and reimbursement treatment. Record who pays, where the electricity is supplied and whether the employer's policy requires evidence.

Salary sacrifice needs a wider comparison

An EV salary-sacrifice quote can look cheaper because the lease payment is taken from gross salary, but the sacrifice may affect pensionable pay, bonus calculations, statutory pay, mortgage affordability checks or other salary-linked benefits. Ask whether the employer shares any employer National Insurance saving and whether the quoted monthly amount includes maintenance, insurance, tyres, breakdown cover and a replacement vehicle. Include any early-termination or parental-leave rules before accepting.

The OpRA rules also need careful treatment. The tax comparison can depend on the car's emissions and whether the arrangement is one of the statutory exclusions, so do not assume that a petrol or diesel sacrifice receives the same treatment as an EV. Use the employer's payroll calculation and HMRC guidance for the actual arrangement. A calculator illustration should be labelled as an estimate until the employer confirms the modified cash equivalent, salary foregone and availability period.

Build a decision record

Save the offer, the vehicle specification, the HMRC pages used, the allowance calculation and the employer's payroll assumptions. Show cash received after Income Tax and employee NI, company-car BIK tax, fuel benefit if relevant, and every cost that moves between employer and employee. Re-run the comparison when the vehicle, tax year, salary, mileage, fuel policy or scheme terms change. If the payslip differs from the estimate, ask which P11D value, appropriate percentage, availability dates and payrolling method were used before treating the difference as an error.

Running Costs You Cannot Ignore

The cash allowance comparison only works if you cost the car properly. Insurance, servicing, tyres and depreciation vary by vehicle and driver. For 2026/27, an eligible electric car registered on or after 1 April 2025 pays £10 VED in its first year and £200 thereafter, with possible expensive-car supplement rules. Company cars may remove insurance, VED and servicing from your personal budget, but check the employer package; for EVs, electricity provided for private use is not treated as a car fuel benefit in the same way as petrol or diesel fuel. Do not treat generic running-cost percentages as tax facts.

Worked Examples

Example 1 — Higher-rate taxpayer with an EV. Priya earns £65,000 and chooses a £50,000 electric company car at 4% BIK instead of a £5,000 cash allowance. Assuming the allowance is fully within her 40% Income Tax and 2% employee-NI bands, it leaves £2,900 after those deductions, and she would then fund insurance and maintenance. The company car creates £800 a year of BIK tax, while the package inclusions must be checked with the employer.

Example 2 — Basic-rate taxpayer with a used car. Tom pays 20% tax and wants a £12,000 used car. A £4,000 cash allowance nets £2,880 after tax and 8% NI, and if his actual running costs are £2,000 a year he keeps £880. A company car may cost more or less depending on its BIK percentage and the employer package, so the allowance only wins after comparing those figures.

Frequently Asked Questions

Model your own figures with the Company Car BIK Calculator→ and check take-home pay with the Salary Calculator→. Pair this guide with Company Car BIK 2026/27→ and Electric Car BIK UK 2026/27 for the full company-car picture.

Official sources

• GOV.UK: Company car benefit appropriate percentages
• GOV.UK: Rates and thresholds for employers 2026 to 2027
• GOV.UK: Vehicle tax for electric, zero and low-emission vehicles
• GOV.UK: Optional remuneration arrangements
• GOV.UK: Class 1A National Insurance 2026
• GOV.UK: Car fuel benefit multiplier

These GOV.UK pages are the official references for company-car percentages, payroll thresholds, optional remuneration, Class 1A National Insurance and fuel benefit. Check the vehicle list and employer terms before comparing packages.