Car Allowance vs Mileage Allowance: Know the Difference

What is a car allowance?

Your employer may offer you a car allowance instead of a company car. They may also provide this as an alternative to providing a company car.

A car allowance is a one-time cash sum you can use to buy a personal vehicle. The choice of vehicle is usually up to you. Yet, your employer may give you the minimum specifications for the vehicle.

These specifications may include age, CO2 emissions, number of seats and more. You’ll be responsible for the costs associated with taxing the vehicle, servicing and maintenance.

A car allowance may be a better option than a company car if you:

Already own a car and don’t need to upgrade

Have a specific vehicle you'd like to buy

Want an asset that you can sell at a later date

Your car allowance is taxed at source at your personal income tax rate. This means that, if you’re a higher rate taxpayer, you’ll be paying 40 percent tax on the allowance. The amount of cash you end up with after taxes could be significantly lower than the value of a company car.

What is the mileage allowance?

A mileage allowance covers the costs of fuel and wear and tear for business journeys.

You can claim a mileage allowance if you use your personal vehicle for work. This includes a vehicle you’ve bought using a car allowance. On the other hand, you cannot claim a mileage allowance if you use a company car.

Unlike a car allowance, a mileage allowance is tax-free, but only if it doesn’t exceed a threshold called the approved mileage allowance payment (AMAP).

If the mileage allowance you get from your employer is less than this, you can file a Mileage Allowance Relief claim with HMRC by completing a P87 form. Anything over these allowances attracts tax at your personal income tax rate.

A car allowance and a mileage allowance are both related to the use of a personal vehicle for work. But, they have different purposes and are subject to different rules.

Let’s go over the difference between a car allowance and a mileage allowance. We’ll also discuss whether you’re better off taking them or opting for a company car instead.