Car Allowance in the UK: A Practical Guide for Employees
Quick summary:
- HMRC car allowance fluctuates massively in the UK, with data from Aaron Wallis suggesting car allowance ranges from £310 to £730 per month/ £3,720 to £8,760 annually.
- With this data, the average car allowance in the UK will roughly be £520 monthly and £6,240 annually.
- However, car allowance isn’t a fixed rate; it depends on a number of factors such as role, seniority, industry, mileage, and region.
What is a car allowance in the UK?
In short, a car allowance is a cash payment added to your salary to cover the cost of using your vehicle for work, whether buying or leasing.
It’s classified as an employee benefit.
Is car allowance taxable?
Car allowance is subject to the following tax:
- Income Tax
- National Insurance contributions
Is car allowance pensionable?
Typically, no, car allowance is not pensionable.
Car allowance is not classified as part of your base salary, but an added extra, making it non-pensionable.
How does car allowance work?
You receive a set monthly amount through payroll and choose your own vehicle. It can be any type: petrol, diesel or electric.
But as your personal vehicle, you’re in charge of insurance, servicing and maintenance.
What’s the difference between a car allowance, salary sacrifice and company car?
Often, people get car allowance confused with salary sacrifice and company cars, but it’s not taken from your wage like sal sac, and it’s not leasing a vehicle like company cars.
Here are the full differences between car allowance, salary sacrifice and company car:
Car Allowance |
Salary Sacrifice |
Company Car |
|
| What is it? | Cash on top of your usual salary | A section of gross salary for a leased car | Employer provides a car as a benefit |
| Who funds the car? | You (after tax) | You (pre-tax salary) | Employer |
| Tax treatment | Taxed as income and National Insurance | Reduces taxable salary. Benefit in Kind applies. | BiK tax applies |
| Deposit required? | Required | None | None |
| Impact on salary | Cash added to your salary | Gross salary reduced | No salary change |
| Running costs included? | No, you are responsible for any running costs | Yes, insurance and servicing is covered | Depends on the policy |
| Vehicle choice | Full freedom | Choice within the scheme | Limited to policy |
How much is car allowance?
Car allowance isn’t one set amount for everyone. In fact, the amount varies depending on a number of factors:
1. Job role, title and seniority level
With more seniority typically comes a higher allowance, especially when it comes to tax brackets.
For example, a home-based marketing assistant will get a significantly lower amount than a director with an hour commute.
2. Industry
Car allowance fluctuates depending on your industry and the needs of your industry. Sales, especially, will benefit from a higher allowance.
A regional sales manager or fleet manager will require a higher allowance for their everyday work lives than an IT officer.
3. Business mileage
The more you drive for work, the higher your running costs.
Employers will often incorporate your mileage and how this will impact your costs.
For instance, an employee who drives 20,000 business miles against an employee who drives 5,000, will receive significantly more allowance.
4. Region
As we all know, the cost of living varies depending on where you live in the UK.
London, as an example, has a significantly higher cost of living compared to Yorkshire.
The amount you receive will reflect and match where in the UK you work.
Hypothetical example:
Employee 1 |
Employee 2 |
|
| Role | Office-based Manager | Regional Sales Manager |
| Industry | Professional services | Pharmaceutical sales |
| Mileage | 6,000 miles/year | 22,000 miles/year |
| Region | North West | Greater London |
| Car | 1.4L Petrol Hatchback | Electric SUV |
| Insurance | £850/year | £1,500/year |
| Running costs (Fuel/charging) | £900/year | £800/year |
| Approx. car allowance | £3,500 – £4,000 | £6,000/£7,000 |
What is the average car allowance in 2026?
In short, there is no fixed national car allowance rate in the UK. Typically, people fall within certain bands.
Here are some of the typical allowances by role, according to research from Aaron Wallis.
Typical allowance by role |
|
| £8,000-£13,000 | Directors (most notably Sales) |
| £6,660 – £8,740 | Senior Sales Managers and directors of SMEs |
| £5,000 – £6,660 | Sales Managers |
| £4,370 – £5,000 | Business Development managers |
| £3,740 – £4,370 | Field Sales Representatives |
What are the advantages and disadvantages of a car allowance? |
|
Pros |
Cons |
| Full freedom in vehicle choice | Subject to tax, including paying Income Tax and National Insurance |
| Flexible: If you change jobs, you keep your vehicle. | Responsibility is entirely on you, including running costs, maintenance costs and more. |
| No Benefit-in-Kind tax | Deprecation can impact resale value |
| Claim mileage back | Running costs could outweigh the car allowance |
What are the benefits of choosing an electric car with a car allowance?
Electric cars come with their own benefits, and these filter through when offered an electric car with a car allowance. It just makes sense.
Lower running costs. Big tax advantages. A smoother, quieter and greener drive with fewer CO2 emissions.
Let’s look at the benefits through a tighter lens:
- Significantly cheaper running costs: Charge for as little as 7p per kWh with the right home EV charging set-up. That’s roughly the cost of your morning coffee for a charge. Want to know more? Work out how much you can save with our EV charger cost calculator.
- Cheaper servicing and maintenance thanks to fewer moving parts inside EVs.
- Tax benefits and exemptions from additional costs: Lower road tax, exemption from the Ultra Low Emission Zone, to name a few.
The big kicker: Salary stretch. With all the aforementioned benefits, including cheaper running costs, lower maintenance costs and better tax options, there’s less cost to you, meaning you keep more of your salary.
Never fear about range anxiety, either. Public EV charging networks are growing fast, with over 88,000 charging stations in the UK.
And there has never been a better time to install an electric car charger, with newly expanded and increased EV charger grants available.
Final thoughts:
All in all, taking advantage of a car allowance in the UK in 2026 has many perks. Get freedom and flexibility: choose the car, the manufacturer and the fuel type. And, for those who are tax-aware, minimise additional taxation on your vehicle.
Adopting an EV over petrol/diesel vehicles is also the smarter move. It’s a gateway into the benefits of choosing electric – lower running costs, less maintenance costs, lower emissions – but also doubles up by leaving you with more salary than you would have by choosing an ICE vehicle with your car allowance.
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