What is a car allowance — and is it taxable?

The short answer

A car allowance is a cash sum your employer pays on top of your salary — typically £3,000 to £8,000 a year, paid monthly — 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 entirely if your role allows. The trade-off is that you carry the costs and hassle: insurance, maintenance, depreciation. For most people the flexibility of cash wins, which is why allowances have become the more common offer.

What it's actually worth

Because it's taxed as income, a £5,000 allowance is worth roughly £3,400 in your pocket as a basic-rate taxpayer, or about £2,900 at higher rate. Still real money — effectively a salary top-up — but don't make the mistake of valuing 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 typically exclude it too. If you drive your own car for business trips, you can also claim tax-free mileage (currently 45p per mile for the first 10,000 business miles a year), separate from the allowance. Check whether the role requires you to actually maintain 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 folded into the offer's effective salary and total package, while pension and bonus correctly stay calculated on base salary. That mirrors how allowances work in real life.

Got an offer with a car allowance? OfferWise scores the whole package — salary, allowance, pension, commute — free.