The cost of running cars can be an expensive one, but car allowances can be an effective way of funding travel and other vehicle expenses such as repairs or refuelling. There are multiple benefits that come with receiving a car allowance, such as being incredibly flexible and having no restrictions.

The question is: are they a better option than receiving lower monthly pay in a salary sacrifice scheme?

Below, we will go over what a car allowance is, how you can spend your car allowance, if it’s taxed, and how it matches up with salary sacrifice options.

What is car allowance?

The meaning of a car allowance is a scheme where employers offer employees additional financial benefits. This means that car allowance isn’t in your salary, it is paid in addition through your payroll.

These allowances are provided on a monthly, quarterly, or annual basis, helping employees to buy or lease a vehicle, or preserve one they already have.

This allows for expenses to be covered such as fuel, insurance or any other repairs that may crop up. As it is paid through your payroll though, it’s subject to normal deductions – which we cover later.

Schemes like this allow for employees to have more freedom when choosing vehicles to drive, rather than being restricted to a company car from their workplace.

How does car allowance work in the UK?

Car allowance is generally intended to be put towards buying a new car, but you can also use it for the upkeep of your current car. It is also something that is typically reserved for more senior employees or people at a management level.

You also aren’t required to prove what you spend car allowance on, with it being an added benefit rather than a form of reimbursement for business expenses. 

As this is the case, you don’t have to spend the car allowance on a car. In fact, you can spend the money as you like, including on leasing vehicles, repairing or fuelling your current car, or on various other personal expenses. 

Although it isn’t always permitted, you can decide to buy a cheaper car or lease and keep the cash as extra salary too.

If you’re interested in car allowances but want to compare them to company cars first, it can be a good idea to understand how company cars work and how company car tax is calculated.

Is car allowance taxable?

The amount of UK car allowance is typically specified within your work contract and is then paid out with your salary. Because it is considered a benefit, it’s then taxed as part of your regular income. This means that you’ll be paying both income tax and National Insurance.

For example:

• If you receive £400 per month in car allowances, then it will be treated like £400 extra salary.
• As it’s also taxed, employees will receive a lower amount following any deductions.

Car allowance vs salary sacrifice options

Though there is some crossover, salary sacrifice options are different to a car allowance.

Salary sacrifice schemes are often more openly available, with many employers offering this, it does depend on where you work. They tend to work by giving access to a new car but in exchange for a lower monthly pay. 

As they are a deduction from a salary rather than in addition, it makes them a pre-tax benefit, meaning that you can avoid income tax and National Insurance.

Essentially, the more you earn, the more you can save, as employees in a higher tax bracket could see savings of roughly 40% over taking out a personal lease.

Salary sacrifice options are also easier for employees, with everything like insurance, servicing, and maintenance being included within these schemes.

Overall, salary sacrifice options are better for people running cars with low emissions, such as electric vehicles (EVs) due to the benefit in kind rates. Whereas car allowances are more beneficial for someone looking to have their own car, with more flexibility available regarding how long they can have the car for and the type of car they drive.

Discover your next motor with Leasing Options 

Now you’re more informed on what a car allowance is, you’ll probably want to take a look at what car leases we have on offer. Alternatively, if you’re dealing with company cars, then you’ll want to check out our business car leasing deals. 

Be sure to speak with our team if you’ve got any questions or require any expert advice.