The short answer
A company car is taxed as a benefit: a percentage of what the car would cost to buy, set by its CO2 figure, is added to your taxable income. A car allowance is taxed as pay. Which leaves you better off depends on three things: the car's CO2 figure, because the percentage for 2026/27 runs from 4% for an electric car to 37% for the highest emitters; whether you are offered the choice of cash, because that can change what the car is taxed on; and how many business miles you drive, because an allowance plus the 55p a mile approved rate can cover a lot of running cost. None of those is a guess; each is on a GOV.UK page linked below.
How a company car is taxed
GOV.UK's page on company cars puts it simply: you pay tax on the value to you of the car, which depends on things like how much it would cost to buy and the type of fuel it uses. The value is lower if you have the car part-time, if you pay something towards its cost, or if it has low CO2 emissions. The percentage applied to the car's price is called the appropriate percentage, and the HMRC manual sets it by CO2 band for each tax year. Fuel your employer pays for your private journeys is taxed separately, on top.
| CO2 figure | Electric range | Percentage, 2026/27 |
|---|---|---|
| Zero | - | 4% |
| 1 to 50g/km | 130 miles and above | 4% |
| 1 to 50g/km | 70 to 129 miles | 7% |
| 1 to 50g/km | 40 to 69 miles | 10% |
| 1 to 50g/km | Less than 30 miles | 16% |
| 51 to 54g/km | - | 17% |
| 100 to 104g/km | - | 26% |
| 155g/km and above | - | 37% |
Between 55g/km and 154g/km the percentage climbs one point for every five grams, from 18% to 36%; the full table is on the HMRC page. Diesel cars carry a supplement of four points unless they are certified to the RDE2 standard, and the percentage never goes above 37%. For a plug-in hybrid, the electric range decides which of the 1 to 50g/km rows applies, and your employer can tell you the figure. Employers work the value out with the HMRC company car and fuel benefit calculator; you can ask to see the result.
How a car allowance is taxed, and the catch when you are offered both
A cash allowance is salary. It is taxed at your marginal rate with national insurance, and you then own the car yourself and carry its running costs. The catch is in the choice. When an employer offers a car or cash instead, the HMRC manual calls it an optional remuneration arrangement, and under those rules the car is taxed on the amount foregone, meaning the salary or cash given up in return for the benefit. The HMRC example makes the point: a car with a taxable value of £3,500 provided in exchange for a £5,000 allowance is taxed on £5,000, the amount foregone, not on the car. So a high-emission car offered against a generous allowance can be taxed on the allowance you did not take.
There is one carve-out, and it is the one that matters most this year: the optional remuneration rules do not apply to cars with CO2 emissions of 75 grams or less per kilometre. An electric car or a low-emission plug-in hybrid offered against a cash alternative is still taxed on its own, low, percentage. That is the mechanism behind the electric company car schemes you may have been offered.
Where business mileage changes the answer
If you take the allowance and drive your own car for work, your employer can pay you an approved mileage rate tax-free. The GOV.UK rates page shows 55p a mile for the first 10,000 business miles in a tax year from 6 April 2026 and 25p a mile above that. The Budget document of 28 October 2026 makes the 55p rate permanent and raises the higher rate from 25p to 35p; when the rates page was read on 30 October it still showed 25p, so check it rather than this article for the date the higher rate takes effect. If your employer pays less than the approved rate you can claim the difference against tax, which our business mileage guide walks through. In a company car you cannot claim these rates; business fuel is reimbursed on separate advisory rates.
How to compare the two offers
- Get the car's figures. Ask for the list price including options, the CO2 figure and, for a plug-in hybrid, the electric range. Then match the CO2 figure to the table.
- Ask whether cash is on offer. If it is, and the car is above 75g/km, the amount foregone rule may apply and the car can be taxed on the allowance instead. Ask the employer which figure they will report.
- Count your business miles. With the allowance, business miles earn the approved rate tax-free; with the car, they do not. The more you drive for work, the more the allowance route recovers.
- Price the running costs you would carry. With an allowance you pay for insurance, servicing, tyres, breakdown and the car's loss in value. A company car bundles most of that. Write the list down before comparing the cash.
- Check the fuel. Private fuel paid by an employer is a separate taxable benefit; if it is offered, ask what it adds.
What this does not mean
This is general information quoted from the HMRC manual and GOV.UK pages as they read on 30 October 2026, not tax advice, and it does not cover salary sacrifice schemes in detail, vans, or national insurance for employers. How you would pay for a car bought with an allowance is outside this article. Rates change each April and HMRC's pages are the ones to rely on; the company car and fuel benefit calculator on GOV.UK gives the figure for a specific car and year.
Frequently asked questions
The appropriate percentage for a zero-emission car is 4% for the 2026 to 2027 tax year, according to the HMRC manual. That percentage of the car's price is added to your taxable income. The same 4% applies to plug-in hybrids at 1 to 50g/km with an electric range of 130 miles or more.
Yes, as salary, with income tax and national insurance. If the allowance is offered as an alternative to a company car, the car itself may be taxed on the cash you gave up rather than on its own value, unless the car's CO2 figure is 75g/km or less.
Not the approved mileage rates. Those are for using your own car. GOV.UK shows 55p a mile for the first 10,000 business miles and 25p above that; the Budget document of 28 October 2026 makes the 55p rate permanent and raises the higher rate to 35p. Company car business fuel is handled on separate advisory fuel rates.
Usually. The HMRC table adds a four-point supplement to the percentage for diesel cars, up to the 37% maximum, unless the car is certified to the RDE2 standard, in which case there is no supplement.
Sources and method
This article contains no MOT statistics. Every percentage, rate and example figure is quoted from the HMRC and GOV.UK pages listed under Sources as they read on 30 October 2026; nothing is calculated here. The MOT reliance notice below applies to the MOT history this site refers to elsewhere.
- GOV.UK: Tax on company cars
- HMRC employment income manual EIM24705: appropriate percentage 2026 to 2027
- HMRC employment income manual EIM44020: the amount foregone
- HMRC employment income manual EIM44060: cars of 75g/km or less
- GOV.UK: Business travel mileage, rules for tax
- GOV.UK: Budget 2026 document
- GOV.UK: Calculate tax on employees' company cars
About these figures. GOV.UK and HMRC content reproduced in summary under the Open Government Licence v3.0. SortedCars is not HMRC; the links above go to the official pages. Where MOT statistics appear on this site they are computed from the DVSA anonymised MOT results dataset. No figure is shown for any group with fewer than 500 tests. Test class 4 only, first tests only; retests are excluded. Pass rates describe fleets, not individual machines: they reflect how cars were driven, maintained and used as well as how they were built, and beyond recorded mileage none of that is in the data. A well-kept example of a model with a weak average can still pass; a neglected example of a strong one can still fail. Alias spellings of a make are counted under one make name and all trims of a model under one model name, using SortedCars' grouping tables.
This article is general information drawn from published test records. It is not professional, mechanical or legal advice, and an MOT pass or a clean MOT history does not guarantee that a car is roadworthy today. If you are unsure about a car, have it inspected by a qualified mechanic. You can check any vehicle's MOT history free on the official GOV.UK MOT history service.
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