How Does the Company Car vs Cash Allowance Decision Work?
When UK employers offer a company vehicle benefit, employees are frequently presented with a pivotal choice: accept an all-inclusive company fleet car or opt for an annual cash car allowance paid through the monthly payroll.
While a cash allowance appears enticing on paper, it is classified by HM Revenue & Customs (HMRC) as standard employment remuneration under Section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). As a result, a £6,000 cash allowance does not give you £6,000 of car-buying power. For a 40% higher rate taxpayer, income tax and 2% employee National Insurance instantly reduce that £500 monthly gross payment to just £290 of net cash in your bank account.
- Full manufacturer vehicle lease / finance repayments
- Fully comprehensive corporate motor insurance policy
- Annual servicing, MOT testing, and replacement tyres
- Nationwide roadside assistance and breakdown recovery
- Vehicle Excise Duty (VED road tax) paid annually by fleet
- Private PCP or personal contract hire (PCH) monthly payments
- Personal car insurance (often £700 to £1,500+ per year)
- Personal liability for servicing, wear-and-tear, and tyres
- Annual VED road tax renewals from personal funds
- Financial risk of excess mileage fees and vehicle depreciation
Understanding the Optional Remuneration Arrangements (OpRA) Rules
Introduced in Finance Act 2017, the Optional Remuneration Arrangements (OpRA) rules (codified under Sections 69A to 69E of ITEPA 2003) fundamentally changed how car choices are taxed. Prior to 2017, employees could trade a high cash allowance for a low-BIK car and escape tax on the cash difference.
Under current statutory OpRA rules:
Taxable Value = MAX( Gross Cash Allowance Foregone, Statutory BIK Value )
If the cash allowance offered is £6,000 and the car's BIK value is £4,500, you are taxed on £6,000. You cannot gain an artificial tax shelter by taking a modestly priced petrol or diesel car.
2026/27 Company Car BIK Tax Bands
Benefit-in-Kind tax is calculated using the vehicle's official P11D value(the list price including VAT, delivery charges, and factory options, but excluding first registration fee and VED) multiplied by the vehicle's statutory BIK percentage based on official WLTP emissions:
| Vehicle Powertrain / Emissions | Pure Electric Range | 2026/27 BIK % | Monthly Tax on £40k Car (40% Taxpayer) |
|---|---|---|---|
| ⚡ Pure Electric (Zero Emission) | All ranges (100–350+ miles) | 4% | £53.33 / month |
| 🔌 Plug-in Hybrid (1–50g CO2/km) | > 70 miles range | 8% | £106.67 / month |
| 🔌 Plug-in Hybrid (1–50g CO2/km) | 30 to 39 miles range | 16% | £213.33 / month |
| ⛽ Efficient Petrol (100–104g CO2/km) | N/A | 25% | £333.33 / month |
| ⛽ Standard Family Petrol (130–134g/km) | N/A | 31% | £413.33 / month |
| 🚗 Euro 6d Diesel (140–144g/km) | N/A | 34% | £453.33 / month |
| 🚗 High Emission SUV / Petrol (155g+ CO2/km) | N/A | 37% (Maximum) | £493.33 / month |
Business Mileage: Approved Mileage (AMAP) vs Advisory Rates (AFR)
A major factor that frequently tips the balance in favour of a cash allowance is business mileage reimbursement:
When driving your private car for genuine business duties, your employer can pay you up to 45p per mile for the first 10,000 miles, and 25p per mile thereafter, 100% tax and National Insurance free (Section 230 ITEPA 2003).
Because modern cars consume roughly 12p to 16p of fuel per mile (or 3p–6p in electricity), the surplus AMAP cash directly subsidises your private finance and insurance!
With a company vehicle, you cannot claim the 45p AMAP rate because you did not buy or maintain the vehicle. Instead, employers pay HMRC Advisory Fuel Rates (e.g. 7p/mile for EVs, 11p–15p for petrol).
AFR rates strictly cover the marginal energy or fuel used, providing zero financial surplus to the employee.