When an employer offers a choice between a company car and a cash allowance instead, it can look like a simple trade — take the car, or take the cash and sort out your own. The tax treatment isn't symmetrical, though, and which one actually leaves you better off depends heavily on what kind of car you'd choose.
How each one is actually taxed
A company car is taxed as a Benefit in Kind — a percentage of the car's value, based on its emissions, added to your taxable income. A cash allowance is taxed much more simply: it's just added to your salary and taxed as ordinary income at your marginal rate, with no separate calculation involved.
This difference is exactly why the answer depends so much on the car. For a low-emission or electric vehicle, the Benefit in Kind percentage is so low that the company car route can end up taxed far more lightly than the equivalent cash would be. For a high-emission petrol or diesel car, the gap narrows considerably, and can even flip the other way.
Why electric cars tilt this so heavily
Company car tax bands are deliberately structured to reward low emissions — a fully electric car sits at a fraction of the tax rate of an equivalent petrol model. A cash allowance doesn't have that mechanism at all; it's taxed at the same rate regardless of what you go on to buy with it. This is the single biggest reason electric company cars have become so popular through employers in recent years — the tax gap between an EV company car and the cash equivalent can be substantial.
What the cash allowance doesn't include
- Insurance — a company car typically comes with this included; with a cash allowance, you're buying and insuring your own car.
- Maintenance and servicing — usually covered under a company car scheme, an out-of-pocket cost otherwise.
- Depreciation risk — with a company car, that risk sits with the employer or leasing company. Buy your own car with the allowance, and any drop in resale value is yours to absorb.
- The finance itself — a cash allowance is simply added income; you still need to arrange and pay for a car outright or on finance from it.
None of this makes the cash option worse — it just means the comparison isn't really "tax rate A versus tax rate B." It's tax rate versus a bundle of costs and risks that a company car scheme usually absorbs on your behalf.
A more useful way to compare the two
Work out the actual annual Benefit in Kind tax on the specific car you'd choose, then compare that to the tax on the cash allowance at your marginal rate, plus a realistic estimate of what you'd spend on insurance, maintenance, and the car itself if you took the cash. For a low-emission or electric car, the company car route often wins clearly. For a higher-emission car, it's much closer, and the cash allowance can come out ahead once you factor in that you could choose a cheaper or older car than the company scheme would offer.
This article is general information, not personal financial or tax advice. Rates and thresholds shown are for the UK 2026/27 tax year and may change — always check gov.uk or mygov.scot for the current figures, or speak to a qualified adviser before making a real decision.
