What is a car allowance — and is it taxable?
Plain-English guide · Free financial education from OfferWise
The short answer
A car allowance is a cash sum your employer pays on top of your salary, usually in monthly instalments, instead of giving you a company car. You use it to buy, lease or run your own car. And yes, it's taxable: it's treated as ordinary pay, so income tax and National Insurance come off it just like the rest of your salary.
Car allowance vs company car
With a company car, the employer provides the vehicle and you pay benefit-in-kind tax based on the car's value and emissions. With an allowance, you get cash and full freedom — choose any car, keep it if you change jobs, or spend the money on something else if your role allows. The trade-off is that you carry the costs and hassle: insurance, maintenance and depreciation. For many people the flexibility of cash wins, which is why allowances are a common offer.
What it's actually worth
Because it's taxed as income, a £5,000 allowance is worth roughly £3,600 in your pocket as a basic-rate taxpayer (after 20% income tax and 8% National Insurance), or about £2,900 at the higher rate (40% tax and 2% National Insurance). Still real money — effectively a salary top-up — but don't value it at the headline figure when comparing offers.
The fine print worth knowing
Car allowances are usually not pensionable — your employer's pension contribution is calculated on base salary only — and salary-linked benefits like death-in-service multiples often exclude it too. If you drive your own car for business trips, your employer can also pay mileage tax-free up to HMRC's approved rates: for the 2026/27 tax year that is 55p a mile for the first 10,000 business miles and 25p a mile after that. This is separate from the allowance. Check whether the role requires you to keep a suitable car as a condition of receiving it.
How OfferWise treats it
OfferWise has a dedicated car allowance field — enter the annual amount and it's added to the offer's effective salary and total package, while pension and bonus stay calculated on base salary. That mirrors how allowances usually work in real life.
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