Employer’s guide: Car allowance vs company cars

Providing vehicles for employees is a key decision for many businesses. As an employer, you’ll typically choose between offering a car allowance or a company car. 

Each option has financial, tax, and administrative implications, so it’s essential to understand which best suits your business needs.

If you’re an employee deciding what’s more attractive - car allowance vs a company car - head to our employee guide. 

Car allowance vs company cars: An overview

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The pros of car allowance

Lower admin burden 

Managing a fleet of company vehicles is often a big administrative task. By opting for car allowance instead, you won't need to search for a suitable vehicle and won’t be responsible for fleet logistics management. Car allowance is just an additional salary component, so it can simplify administration overall. 

No maintenance or insurance costs

By supplying the employee with car allowance to purchase, lease or maintain their own vehicle, you’re also placing the responsibility for repairs and maintenance on them. 

Flexibility for your employees

Employees might appreciate being able to use a personal vehicle they already own, or purchase or lease one of their own choosing. It’s worth noting that while car allowance is meant to be used towards vehicle financing, employees can use it on whatever they like without supplying documentation. In that way, it can prove to be an attractive benefit and a great incentive to retain staff. 

Easier option for remote or hybrid teams

If your employees don't need a car full-time, a car allowance might be a great alternative to a full company car fleet. 

The cons of car allowance

Limited access to a suitable vehicle

New employees may not have access to credit to purchase a car or have a poor credit rating, making it difficult for your staff to choose a suitable vehicle. 

Less attractive benefit for employees 

With car allowance, employees bear the costs of insurance, servicing, and depreciation. Company cars tend to be a more attractive benefit to employees, as no upfront costs are involved. 

No control over the vehicle choice 

Providing car allowance instead of a company car means as an employer, you won’t have any control over the type or condition of the vehicles employees use for business driving. Employees may use older or unsuitable cars for work travel.

National Insurance payouts

As an employer, you will be liable to pay National Insurance contributions on the car allowance you pay out. 

Potential reimbursement burden (Mileage Allowance Payments)

Employees in the UK can still claim mileage allowance on top of the car allowance if they drive a private car for business. That means the administration burden of managing their claims falls on you as an employer.

The pros of company cars

An attractive perk for employees 

Offering a company car as a benefit might help improve employee satisfaction and performance by ensuring that employees always have a mode of transportation to get their work done. A company car eliminates the need for employees to purchase or manage their own vehicles, which makes it a benefit often valued when choosing a company. 

Opportunity for business branding

You can brand your company cars using company logos, slogans, and overall branding, increasing visibility and promoting your business effortlessly while employees are out completing their work duties.

The cons of company cars

The company is responsible for paying for any expenses

Providing company cars to employees increases your liability as an employer. If your employees are involved in any kind of accident then you will be responsible for paying for damages, and this will lead to an increase in the premiums your company pays for car insurance.

High cost of acquiring and maintaining a fleet

Providing company cars will be a substantial investment, especially for small and medium enterprises. It requires a considerable investment upfront to buy the vehicles, unless there is a suitable factoring company. There can be additional costs of replacing the car in case of any accidents or theft if your insurance does not pay and added depreciation.

Which is best for your business?

It mostly depends on personal preference and your company's situation. 

Both options have their pros and cons. A car allowance gives freedom to employees to choose their vehicles but comes with more responsibilities for the employee such as maintaining the vehicle and tax payments. 

Providing a company car may increase responsibilities for your business but can act as a great benefit to attract employees. 

Reimbursing mileage and fuel as an employer

Whichever option you choose, if your employees pay for the fuel and maintenance of the vehicle's business portion of use, you may be expected to reimburse them for these expenses. 

For company cars, look into the 2025 advisory fuel rates for reimbursement. 

For car allowance, read our HMRC mileage guide and 2024/25 HMRC mileage rates. 

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