The debate over company cars versus cash allowances has been around for some time, but rising costs, evolving tax regulations, and shifting employee expectations have brought it into sharper relief recently. These factors are making businesses rethink their approach to vehicle benefits.

The landscape is changing significantly.

The 2024 Budget introduced major tax reforms that affected company-provided vehicles. Most starkly, EVs – previously exempt from Vehicle Excise Duty – are now set to incur standard rates from April 2025. Newly registered EVs will also face a first-year tax of £10 and an annual charge of £195 moving forward.

On top of this, the £40,000 price threshold for the expensive car supplement will subject higher-priced EVs to an extra £425 annually for five years. VED rates for petrol and diesel cars are also set to double, which will push the cost of ownership for traditional ICE cars up.

Employee preferences are also shifting.

Many now value the flexibility of choosing their own vehicles, which might lead employers to think about cash allowances or personal leasing schemes as an alternative to traditional company cars. Doing so means employees can pick a car that fits with their personal needs and lifestyle which has a host of benefits for both staff and employers. It’s clear, then, that businesses need to closely assess the pros and cons of each option.

What’s the appeal of car allowances?

Car allowances give employees the flexibility to choose their own vehicle or use the money for other expenses. This can simplify administration for businesses and reduce the need to manage a fleet directly.

A cash allowance is essentially a set monthly amount paid to an employee instead of providing a company car. The employee can then use it to lease or buy a car of their choice; it’s an option that appeals to people who prefer using the money in other ways or who already own a suitable vehicle. If an employee chooses to buy a vehicle using their allowance, it also means that they own the car outright, so resale in the future becomes an option, too.

There are other areas to consider, though.

Employees taking a cash allowance are naturally responsible for their own vehicle costs, including insurance, maintenance, and tax. Depending on their tax band, they might also end up paying more income tax on the allowance than they would on a low-CO2 or electric company car.

What are the tax implications?

Tax is one of the biggest factors influencing the decision between a company car and a cash allowance.

Company car tax is calculated based on the vehicle’s value, CO2 emissions, and the employee’s income tax rate. The government has encouraged EV adoption by keeping BIK rates low for electric company cars. In 2025/26, the BIK rate for fully electric vehicles will remain highly competitive, only rising slightly from current levels.

On the other hand, a car allowance is treated as income and is subject to income tax and National Insurance contributions. For higher-rate taxpayers, this can significantly reduce the net amount received.

The tax implications are different for employers, too.

Providing a company car may be subject to Class 1A National Class 1A National Insurance, while a cash allowance is simply part of payroll costs. Understanding these differences is critical when making financial comparisons.

Accessing a company car doesn’t need to be restrictive.

In many ways, a salary sacrifice scheme gives you the best of both worlds. Employees can choose the right vehicle for them – including EVs – without having the tax penalty of a cash allowance. This brings a degree of flexibility that wasn’t possible with the traditional structure of a company car fleet while still maximising the tax benefits as much as possible.

Find the perfect employee benefit scheme with SG Fleet.

We’re the UK’s only provider of both personal and business-lease-based salary sacrifice schemes. Our Novalease solution is zero-risk and has minimal admin, making it the perfect alternative to a company car fleet. If you prefer employees not to be credit checked – and you’re comfortable with contracting the vehicles – then Salarylease might be the best option.

Whichever route you take, one fixed payment covers all vehicle-related costs except fuel or EV charging and gives you access to any new or used car on the market. There’s no deposit, and with a comprehensive reporting suite and full HMRC compliance, you get total peace of mind. If you want to find out more about our solutions, get in touch with our team today.

FAQs

What is the difference between a company car and a car allowance?

A company car is provided by an employer for business and personal use, with costs covered by the employer. A car allowance is a cash payment given instead of a company car, leaving the employee responsible for their vehicle expenses.

Which option is more tax-efficient?

This depends on the employee’s tax band and vehicle choice. Electric company cars currently attract lower BIK tax rates, making them more tax-efficient than taking a cash allowance, which is subject to income tax and National Insurance.

Can employees use a car allowance to lease a car?

Yes, employees can use a car allowance to lease or buy a vehicle. However, they must cover all associated costs, including insurance and maintenance.

What are the benefits of salary sacrifice for company cars?

Salary sacrifice schemes allow employees to access vehicles at a lower cost due to income tax and National Insurance savings. They are particularly beneficial for electric vehicles due to their low BIK rates.

How can businesses encourage greener vehicle choices?

Businesses can offer incentives such as lower BIK rate company cars, salary sacrifice schemes, and fleet policies that prioritise low-emission vehicles.

Further Reading

-       Mobility Trend Predictions for 2025

-       How Can We Adapt Fleet Management to UK Mobility Trends?

-       How Will the UK Government’s VETS Scheme Impact Fleet Customers?

-       When Will the UK Car Market Return to Pre-Covid Levels?