Should You Give Up Your Company Car? How to Decide in the UK

Many UK employees with a company car eventually face a choice: keep the company car, or give it up for a cash allowance and buy your own. The answer isn't always obvious. A £500/month car allowance sounds generous — until you factor in tax, National Insurance, insurance, maintenance, depreciation, and fuel.

This guide walks through the eight factors that determine which option is better for you, with a decision flowchart and real-number comparisons.

1. When to Keep the Company Car

The company car is likely your better option if:

• You have (or can get) a low-BIK electric or plug-in hybrid — At 2% BIK for pure EVs in 2026/27, the tax cost is negligible. A £40,000 EV company car costs a 40% taxpayer just £28/month in BIK tax
• You drive high mileage — Company cars typically include maintenance, tyres, and breakdown cover. High mileage increases these costs significantly if you're paying out of pocket
• You don't want the hassle of car ownership — No MOTs to arrange, no unexpected repair bills, no shopping for insurance, no worrying about depreciation
• Your employer covers fuel for private use — Though the fuel benefit charge exists, some employers absorb this or offer a fuel card that covers personal mileage
• You prefer a newer, more reliable car — Company cars are typically replaced every 3–4 years, so you always drive something relatively new

2. When to Take the Allowance

The car allowance is likely better if:

• Your current company car has a high BIK rate — A diesel or petrol car with high CO2 emissions can result in BIK tax that rivals or exceeds the cost of running your own car
• You drive relatively low mileage — If most of your driving is personal and your business mileage is low, the running costs of your own car will be lower
• You want choice — A car allowance lets you pick any car you want, buy used (better value), or even choose to go without a car entirely and pocket the cash
• The allowance is generous — Some employers offer £500–£700+/month. After tax, this can still leave you well ahead if you buy a sensible car
• You already own a car you're happy with — If your current personal car is paid off and reliable, taking the allowance is essentially free money (minus tax)

3. The Hidden Costs of Running Your Own Car

When comparing a company car to a car allowance, people often underestimate what it actually costs to run their own car. Here's a realistic annual breakdown:

A company car covers all of these costs except fuel (and sometimes even fuel). The allowance needs to cover all of them after tax.

4. Mileage Reimbursement on Your Own Car

If you give up the company car and use your own car for business travel, your employer can reimburse you using HMRC's Approved Mileage Allowance Payments (AMAP) rates:

These rates are tax-free. If your employer pays less than AMAP rates (or nothing at all), you can claim tax relief on the difference through your self-assessment tax return or by contacting HMRC.

For high-mileage drivers, AMAP payments can make a significant contribution towards running costs. At 15,000 business miles per year, you'd receive £5,750 tax-free (£4,500 for the first 10,000 miles + £1,250 for the next 5,000).

5. Tax on the Car Allowance

This is where many people get caught out. A car allowance is taxed as income — you pay both income tax and National Insurance on it.

Approximate take-home figures including employee NI at 8%. Actual amounts depend on your specific tax code and circumstances.

A £500/month allowance for a 40% taxpayer nets roughly £275/month — which needs to cover depreciation, insurance, maintenance, MOT, tax, and everything else except fuel.

6. The Break-Even Calculation

To work out which is better for you, compare the total annual cost of each option:

Company car cost = Annual BIK tax + any employee fuel contribution

Car allowance cost = Total running costs − net allowance received − AMAP mileage payments

Let's compare for a 40% taxpayer doing 12,000 business miles per year:

In this example, the EV company car is the clear winner at just £336/year. The car allowance is better than the diesel company car (£2,800 net gain vs £4,480 cost). But if the company offers an EV, keeping the company car wins every time.

7. What Happens to Your Existing Company Car

When you give up a company car, you typically have several options:

• Return it to the employer / leasing company — The most common option. You hand back the keys, and the car goes back to the fleet
• Buy it at residual value — Some employers or leasing companies offer you the option to buy the car. The price is usually the pre-agreed residual value from the lease. This can be a good deal if the car's market value is above the residual
• Early termination fees — If you're mid-lease, there may be early termination charges. Check your company car policy before committing
• Notice period — Most company car schemes require 3–6 months' notice before you can switch to an allowance. Plan ahead

8. The EV Game-Changer

Electric vehicles have fundamentally changed the company car vs allowance calculation. At 2% BIK in 2026/27, an electric company car is almost impossible to beat with a cash allowance.

Consider a Tesla Model 3 Long Range with a P11D value of £45,000:

• Basic rate taxpayer (20%): £45,000 × 2% × 20% = £180/year = £15/month
• Higher rate taxpayer (40%): £45,000 × 2% × 40% = £360/year = £30/month

For £30/month (higher rate), you get a brand-new £45,000 car with insurance, maintenance, road tax, and breakdown cover all included. No car allowance can come close to matching this value.

The 2% BIK rate is confirmed until April 2027, rising to 3% in 2027/28 and 4% in 2028/29 — still dramatically lower than petrol or diesel rates. If your employer offers an EV company car, it's almost certainly the best financial decision.

Decision Flowchart

Final Thoughts

The right answer depends entirely on your specific numbers. For most people in 2026, an electric company car at 2% BIK is the best deal by a wide margin. If an EV isn't available, run the break-even calculation comparing your actual BIK tax against the net car allowance minus real running costs.

Don't make this decision based on gut feeling or what a colleague told you. Spend 30 minutes with a calculator and the figures from this guide, and you'll have a clear, evidence-based answer.

Tax rates, BIK rates, and AMAP rates are set by HMRC and can change. Always verify current figures at GOV.UK or consult a qualified accountant.

Related reading: Company Car Tax Calculator | Company Car vs Car Allowance