Car Allowances Explained: Is it right for you and your situation?

So you have the option of a car allowance or you've seen it mentioned in a job advert. Let's walk through it so you know exactly what it means... 

So, what's a Car Allowance? 

Simply put, a car allowance is extra money your employer adds to your salary to help cover your car costs. Instead of giving you an actual company car, they're essentially giving you cash to sort it yourself.  

The great thing about this is that you've got the freedom to get whatever car you want - you might even already have a car, in which case it's just extra cash for you (although you may need to maintain it better than you normally would if you are using it for work).  

But here's the catch that many people don't realise until it's too late – that car allowance counts as income, which means the taxman will want his share before you get yours. 

Car Allowance vs. Company Car

Imagine you've been offered either a £5,000 car allowance or a company car. Let's see what works out better for you.

With a car allowance, you pick the car, you handle the maintenance, and you decide what happens when you're ready for a change. Plus, no company car tax – hurray!

A company car, on the other hand, your employer provides the vehicle (you might be able to choose it still), covers the maintenance, and generally handles all the boring bits. When something goes wrong, it's their problem, not yours. But, you will need to pay Company Car Tax, which could be a LOT depending on the vehicle – more on that here.

What can you do with your car allowance?

Once you've got your car allowance sorted, you've got several ways to use it:

Get a lease car

Personal leasing is very popular among those with a car allowance. This is because it pretty much works the same as a company car, without the BIK. The monthly rentals are typically less than finance and you don't need to worry about reselling, depreciation, etc. Plus, road tax, breakdown, and warranty are included – even servicing and tyres if you opt for maintenance.

Get a car on finance

Or, if you think you'd want to end up owning the car, car finance, like a PCP, might be a better option. With a PCP, you pay a deposit, pay monthly for your PCP term (normally 4 years), then at the end, you decide if you want to buy it or not.

Another option is HP, where you literally pay off the whole vehicle over your agreed term. More than PCP monthly, but at the end, you own it.

Buy a car outright

If you've got the cash, you could buy a car outright and treat your allowance like extra income – because, it is...

That said, this is very uncommon, as cars lose so much money and you've probably got better places to put your cash.

Keep the money and use your current car

If you've already got a car that is suitable to use, you could just pocket the cash and do that. One thing to consider is that if you end up using it more, it'll depreciate more, require more maintenance, etc...hopefully the allowance covers that, though.

Tax on your allowance

This is the less exciting part (you've been excited by the rest of this guide, right?). As it is classed as income, it is taxed the same. This means you're going to lose a chunk to the HMRC before it reaches you. So, if you are in the 40% tax band and your allowance is £8k per year, you'll only see £4,800 of it!

If any of these points tempt you into going for a company car instead, you will pay Benefit-in-Kind (BiK) tax, which is based on the car's value and CO₂ emissions, P11d and your tax bracket. This can work out cheaper, especially if you opt for a low-emission vehicle like an electric car or a plug-in hybrid.

Which Option Makes Sense for You?

A car allowance might be best if...

• You have your heart set on a specific car that you can't get as a company car

• You like the freedom to change your cars on your terms

• You don't mind handling the admin side like insurance, maintenance, etc.

• You're happy for it to be taxed.

• You're just going to use your current car and pocket the cash.

A company car could be better if...

• You want a hassle-free option with no maintenance or insurance worries.

• You're interested in a low-emission or electric vehicle (BIK is likely to be lower than the allowance tax).

• You don't want to deal with selling your car later.

• The simplicity of having everything taken care of appeals to you (like me).

So, is a Car Allowance Worth It?

Car allowances can be a fantastic perk if you use them wisely, but they're not free money. Remember to always factor in tax and all the costs of running a car before you make any decisions.

If you're still weighing up whether to lease, finance, or buy with your allowance, why not drop us a line? We help people navigate these decisions every day, and we'd be happy to look at your specific circumstances to find the best solution for you.