Company car, car allowance or salary sacrifice: which is better?

A company car, a car allowance and salary sacrifice all end the same way, with someone driving a car they didn't buy outright. The difference is who funds the car and how it's taxed. Which is also what determines the cost to your business.

• A car allowance is cash. It's taxed in the same way as an employee’s salary, so Income Tax and National Insurance come out of it, and the employer pays employer National Insurance on top at 15%.
• With a company car, your business funds the car and the driver pays Benefit-in-Kind tax (also known as company car tax). On a fully electric car that's charged at 4% of the list price in the 2026/27 tax year.
• With salary sacrifice, the employee funds the car from their pre-tax salary, so the employer’s National Insurance on that pay also comes down.
• Completely replacing a company car scheme with a salary sacrifice scheme isn't the only route. Some employers run two of these alongside each other.
• If someone needs a car to do their job, the employer usually has to provide it. Salary sacrifice is voluntary and employee-funded so it’s a different agreement. 

A car allowance is usually a cash payment you add to an employee's salary so they can buy or lease a car themselves. Your business doesn't own it, doesn't lease it, and doesn't carry it on the balance sheet. The employee chooses it, insures it, maintains it and keeps it if they leave.

It's typically offered to people who drive for work, or when they reach a certain level of seniority, as an added employee benefit.

You’ll usually pay a car allowance monthly through payroll, and it’ll show as its own line on the payslip. Some employers pay it once a year instead. Fuel is usually reimbursed on top, at HMRC's approved rates.

HMRC’s mileage rates changed recently. Employers can pay 55p a mile for the first 10,000 business miles from 6th April 2026, up from 45p, and 25p a mile above that, with nothing to report to HMRC. Anything above the approved amount needs to go on a P11D and gets added to your employee’s taxable pay.

Yes. A car allowance counts as salary, so it's taxed like the rest of the employee’s pay. Income Tax and employee National Insurance come out of it, and your business pays employer National Insurance on top at 15% for 2026/27.

That second part is easy to overlook. A £6,000 allowance costs your business £6,900 once employer National Insurance is added, and the employee banks well under £6,000.

Mileage (aka fuel costs) works differently. Payments up to the approved rates are tax free for the driver and the employer doesn’t need to report it to HMRC.

There's no set rate. It depends on the job role, the mileage and what the market pays for that job in your area.

As a starting point, these are the benchmark ranges published by recruiter Aaron Wallis in July 2026. Every business is different, so treat these as a starting point.

A £5,000 allowance leaves a higher rate taxpayer with roughly £2,900 to spend on a car, once they’ve paid Income Tax and National Insurance.

Because it does a job that a salary doesn't. The money is earmarked, so it’s seen as a benefit rather than a pay rise, and it’s also a status signal that the role comes with a car without you having to pay for one personally.

There's no fleet to manage, no asset on the books, and no Benefit-in-Kind to report. For a smaller business, that's a genuine saving in admin time compared with other types of car scheme.

So is it better to have a car allowance or salary? For the employer’s tax, there's no difference.The advantage sits in what the allowance signals to your team, and in the tax-free mileage that comes with it. 

A company car is one your business buys or leases and hands to an employee. The driver pays tax on that benefit, known as Benefit-in-Kind, or BiK. For an electric car, BiK is charged on the list price at 4% in the 2026/27 tax year.

HMRC's figures show 920,000 employees had a company car in 2024/25, up from 720,000 in 2020/21. Of those, 51% are fully electric.

Salary sacrifice is where an employee gives up part of their pre-tax salary in exchange for a non-cash benefit. Here, that benefit is an electric car.

The employee's pre-tax pay drops by the cost of the car, so your employer National Insurance on that pay also drops. You still pay Class 1A National Insurance on the Benefit-in-Kind, but on an electric car that's calculated on 4% of list price, so it stays small.

One change worth knowing about. From April 2029, only the first £2,000 an employee sacrifices into their pension each year stays free of National Insurance. That change applies to pensions. It doesn't affect cars taken through salary sacrifice.

Want more detail on EV salary sacrifice? Our guide for employers covers setting a scheme up in full.

The differences that matter are about funding, tax and risk.

Here's an example using published HMRC rates for 2026/27. It’s based on a £6,000 car allowance, an employee earning above the National Insurance secondary threshold, and a £35,000 electric car. Specific figures will differ.

• You (the employer) pay £6,000 through payroll, plus employer National Insurance at 15%, which is £900.
• Cost to your business = £6,900 a year.

• The employee pays for the car from their pre-tax salary, so your employer National Insurance on the sacrificed amount falls. You pay Class 1A National Insurance at 15% on the Benefit-in-Kind.
• On a £35,000 electric car, the benefit is 4% of list price, or £1,400, so you pay £210 of employer National Insurance.
• The two aren't quite like for like. The allowance is money you hand over, while the sacrifice is money the employee redirects. But it shows where the cost sits…

It depends on why your team has cars through your business. Where a car is a benefit, salary sacrifice can do a similar job, at a lower cost to your business. Where a car is something people need so they can work, you may still have to provide it, so salary sacrifice alone might not be the right solution. 

The clearest reason is cost. Under a company car scheme your business buys or leases the car, so the cost sits with you, the employer. Under salary sacrifice the employee funds it from pre-tax salary.

Your employer National Insurance position changes with it. Because a sacrifice reduces pre-tax pay, your employer National Insurance on that pay falls. You still pay Class 1A at 15% on the Benefit-in-Kind, but on an electric car that's charged on 4% of list price in the 2026/27 tax year, so your bill stays small.

The risk you take on as a business is different too. There's no resale value exposure on cars your business owns.

There's also less to admin. No fleet to manage, and a salary sacrifice scheme costs nothing to set up. Just the admin time each month to adjust payroll. 

And salary sacrifice can benefit more of your team. Company cars are usually limited to certain grades, while a scheme can be opened to anyone who qualifies, as long as it doesn’t take them below the National Minimum wage. If your organisation reports under IFRS 16, the accounting treatment differs, and we've covered the IFRS 16 treatment separately.

If your team can't do the job without a car, you'll need to keep providing those. Salary sacrifice is voluntary and employee-funded, so business leasing may be a better route for those employees, and a scheme can still go to everyone else.

If you're part-way through existing leases, this is about timing rather than principle. Look at when the contracts end and phase things in from there.

If a company car is written into employment contracts, changing it means changing their conditions, so plan for consultation and speak to an employment adviser on how to handle it.

If you want to include lower-paid staff, check the pay floor first. Sacrifice can't take someone's pay below the National Minimum Wage or National Living Wage, so you may want to keep another route open for them.

And if drivers need a van, need to tow, or can't charge anywhere realistic, an electric car scheme probably won't cover them.

Replacing one with the other isn't the only outcome. Some employers keep providing company cars where the job needs one, and add salary sacrifice alongside for everyone else.

Five questions worth answering before you decide:

1. Do these drivers need a car to do the job, or is the car a benefit?
2. When do your existing leases end, and what would ending them early cost?
3. Is a company car a contractual entitlement for anyone?
4. What's the pay range of the people you'd want to include?
5. Would an electric car cover the driving they actually do?

Talk the numbers through with your finance team, and anything contractual with an employment adviser.

Yes. They're separate arrangements and can run alongside each other. Offering both gives people a choice, which matters when one option won't suit everyone.

There's a tax rule worth understanding. Where an employee can choose between cash and a car, HMRC would normally tax whichever is higher. That would cancel out the point of sacrificing salary. But there's an exemption: for cars emitting 75g/km or less, you always use the Benefit-in-Kind charge instead.

Electric cars sit inside that exemption. So running a cash allowance alongside doesn't break the tax treatment of an electric car taken through sacrifice.

1. Keep the allowance, sacrifice from total pay. The employee keeps their cash allowance and sacrifices from salary for the car. It's the simplest to administer. Just watch that pay after sacrifice stays above the National Living Wage.
2. Trade the allowance for the car. The employee gives up the allowance, in whole or in part, and takes a car through the scheme instead. This is generally the better outcome for them, because the allowance is taxed as salary and the sacrifice isn't.
3. Allowance for those who opt out. The scheme is the default, and the allowance is what someone gets if it doesn't suit them, perhaps because they need a vehicle the scheme doesn't offer. This works where a car is a job need rather than a perk.

Two things to be straight with your team about. Sacrifice can't reduce pay below the National Living Wage, which is £12.71 an hour for ages 21 and over from April 2026, so some employees won't be eligible. 

And because a sacrifice reduces pre-tax pay, it can affect pension contributions, statutory maternity pay and how much someone can borrow on a mortgage. Say so up front, and point people to their own adviser.

If you already run a company car scheme or pay a car allowance, our EV salary sacrifice scheme can sit alongside either. It doesn't have to replace what you already have.

EV salary sacrifice is free for employers to set up, and organisations can save on employer National Insurance Contributions. It's managed digitally, with an HR dashboard and account support, so there's no fleet team to build. And the risk for your business is reduced with our cover for leavers and life events.

The monthly cost covers the car, insurance, servicing, maintenance, repairs, tyres, MOT and breakdown cover. 

Drivers can also choose a discount on home charger or charging credit. And there's a discounted home charging rate on Octopus Energy's Intelligent Octopus Go - EV Saver tariff, exclusive to Octopus EV drivers.