Company Car vs Mileage Allowance: Which Saves More Tax in 2025/26?

As a UK limited company director, how you handle business travel can have a significant impact on your tax bill. The three main options - company car, personal car with mileage claims, and car allowance - have vastly different tax consequences depending on your circumstances.

The quick answer for 2025/26: If you drive a petrol or diesel car, claiming mileage on your personal vehicle almost always wins. But if you are considering an electric vehicle, the 2% benefit-in-kind rate makes company cars genuinely attractive. And car allowances? They are usually the worst option from a pure tax perspective.

This guide walks through all three options with worked examples, comparison tables, and break-even analysis so you can make the right choice for your situation.

The Three Options Explained

Before diving into numbers, let us understand what each option actually means for you and your company.

Option 1: Company Car

Your company owns or leases a vehicle and provides it to you. You pay benefit-in-kind (BIK) tax on the private use, calculated as a percentage of the car's list price based on its CO2 emissions. The company handles all running costs - insurance, road tax, maintenance, and often fuel.

Option 2: Personal Car with Mileage Allowance

You own the car personally. Your company reimburses you for business miles at HMRC's Approved Mileage Allowance Payment (AMAP) rates - 45p per mile for the first 10,000 miles, then 25p per mile thereafter. These payments are tax-free to you and deductible for your company.

Option 3: Car Allowance

Your company pays you a fixed monthly cash allowance specifically for running a car. You buy and run the car yourself. The allowance is treated as salary - subject to income tax, employee National Insurance, and employer National Insurance. It is the least tax-efficient option for most directors.

Company Car BIK Rates 2025/26

The amount of tax you pay on a company car depends on the car's CO2 emissions. Here are the complete BIK rates for 2025/26.

The key insight: electric vehicles at 2% are taxed at roughly 10-18 times less than typical petrol cars.

How BIK Tax is Calculated

Company car tax follows a straightforward formula:

Annual BIK Tax = P11D Value x BIK Percentage x Your Marginal Tax Rate

Where:

• P11D Value = List price including options and VAT, minus first registration fee and road tax
• BIK Percentage = From the table above, based on CO2 emissions
• Marginal Tax Rate = 20% (basic), 40% (higher), or 45% (additional rate)

Worked Example: Petrol Car BIK

Vehicle: BMW 3 Series 320i P11D Value: £42,000 CO2 Emissions: 135g/km BIK Rate: 32%

A higher-rate taxpayer pays over £5,000 per year just in tax for this company car - before considering employer NI.

Worked Example: Electric Car BIK

Vehicle: Tesla Model 3 P11D Value: £42,000 CO2 Emissions: 0g/km BIK Rate: 2%

The same value electric car costs a higher-rate taxpayer just £336 per year - 16 times less than the petrol equivalent.

Mileage Allowance Rates 2025/26

When you use your personal car for business travel, your company can reimburse you at HMRC's Approved Mileage Allowance Payment rates.

These rates are designed to cover:

• Fuel costs
• Vehicle depreciation
• Insurance
• Road tax
• Servicing and maintenance
• Tyres
• MOT

The payments are completely tax-free to you - no income tax, no National Insurance. Your company can claim Corporation Tax relief on the full amount paid.

What Counts as Business Mileage?

You can claim mileage for journeys that are wholly and exclusively for business purposes:

Claimable:

• Client visits
• Travel to temporary workplaces
• Travel between business locations
• Trips to suppliers or business meetings
• Site visits
• Business conferences and training

Not claimable:

• Your regular commute from home to a permanent workplace
• Personal errands
• Travel that would happen regardless of business need

If you work from home as your main base, travel to client sites or occasional office visits is generally claimable.

Advisory Fuel Rates for Company Cars

If you have a company car and pay for your own fuel for business journeys, your company can reimburse you at HMRC's Advisory Fuel Rates (AFR). These are lower than mileage allowance rates because they only cover fuel - not running costs.

Advisory Fuel Rates from December 2024

Petrol Cars:

Diesel Cars:

LPG Cars:

Electric Cars: 8p per mile

Note: You cannot claim the 45p/25p mileage rates if you have a company car - only advisory fuel rates.

Worked Example: Petrol Car, 10,000 Business Miles

Let us compare all three options for a typical scenario - a director doing 10,000 business miles per year in a mid-range petrol car.

Assumptions:

• Car value: £35,000
• CO2 emissions: 130g/km (BIK rate: 30%)
• Annual business miles: 10,000
• Tax status: Higher rate taxpayer (40%)
• Engine size: 2.0 litre petrol

Option 1: Company Car

You also get free private use (but taxed on it) and the company handles all running costs.

Option 2: Personal Car + Mileage

You receive £4,500 tax-free and pay no tax or NI.

Option 3: Car Allowance (£500/month)

You receive £3,120 after tax but the company paid £6,900 including employer NI.

Petrol Car Comparison Summary

For petrol cars, mileage claims win decisively. You receive £4,500 tax-free versus paying £4,200 in tax for a company car.

Worked Example: Electric Car, 10,000 Business Miles

Now let us run the same comparison for an electric vehicle.

Assumptions:

• Car value: £45,000
• CO2 emissions: 0g/km (BIK rate: 2%)
• Annual business miles: 10,000
• Tax status: Higher rate taxpayer (40%)

Option 1: Company Car (Electric)

For under £500 per year in total tax, you get a £45,000 car with unlimited private use.

Option 2: Personal Car + Mileage (Electric)

You still receive £4,500 tax-free - but you had to buy the £45,000+ car yourself.

Option 3: Car Allowance (£500/month)

Same as before - £3,120 net after tax, £6,900 total cost to company.

Electric Car Comparison Summary

The electric car changes the calculation. While mileage claims still result in zero tax, you must buy a £45,000+ car yourself. The company car costs just £495/year in tax but the company provides the vehicle, insurance, road tax, and often charging too.

The Electric Car Advantage: Why 2% BIK Changes Everything

The 2% BIK rate for electric vehicles has fundamentally changed the company car calculation. Here is why:

Tax Cost Comparison by Car Value

A £50,000 electric company car costs just £400/year in tax versus £6,000 for an equivalent petrol car.

Additional Electric Benefits

Beyond the low BIK rate, electric company cars offer:

• Free workplace charging - No additional BIK if your company provides free electricity at work
• No fuel benefit charge - Unlike petrol where company-paid private fuel triggers a massive tax charge
• 100% capital allowances - The company can deduct the full purchase price against Corporation Tax in year one
• Full lease deductions - No 15% restriction that applies to higher-emission vehicles
• Zero road tax - Saving £100-600 per year
• Lower running costs - Electricity costs less than petrol per mile

Car Allowance: How It Works and Tax Treatment

A car allowance is a fixed cash payment on top of your salary. Despite the name, HMRC treats it as additional salary, not a benefit.

Tax Treatment of Car Allowances

When Car Allowance Makes Sense

Car allowances are rarely the most tax-efficient option, but they might suit you if:

• You want complete flexibility over vehicle choice
• You do very low business mileage (so mileage claims would be minimal)
• Your company prefers simple cash payments over benefits administration
• You value the certainty of fixed monthly income

The Hidden Cost of Car Allowances

Consider a £6,000 annual car allowance for a higher-rate taxpayer:

The company spends £6,900 but you receive only £3,120 - a 55% effective tax rate. With mileage claims, £6,000 paid would be £6,000 received tax-free.

Complete Side-by-Side Comparison

Here is a comprehensive comparison of all three options for different scenarios.

Scenario: 10,000 Miles, £40,000 Car Value, Higher Rate Taxpayer

Break-Even Analysis: When Does a Company Car Make Sense?

The break-even point depends on your circumstances. Let us calculate when a company car becomes worthwhile.

For Petrol Cars

With 30% BIK on a £40,000 car, a higher-rate taxpayer pays £4,800/year in BIK tax plus £1,800 employer NI.

To match this in tax-free mileage claims at 45p per mile:

• First 10,000 miles = £4,500
• Additional miles at 25p = £1,300 more for 5,200 miles
• Break-even: approximately 15,200 business miles

But this ignores that with mileage claims you also bear all running costs personally.

Practical conclusion: For petrol cars, the company car rarely makes sense unless you do minimal business mileage but want significant private use without paying for a car personally.

For Electric Cars

With 2% BIK on a £45,000 electric car, a higher-rate taxpayer pays just £360/year plus £135 employer NI.

This is so low that the break-even calculation changes completely. Even at zero business miles, the company car only costs £495/year in tax - but you get a £45,000 car without buying it yourself.

Practical conclusion: For electric cars, the company car is almost always worthwhile. The 2% BIK rate is essentially subsidised private car use.

Break-Even Summary Table

Lease vs Purchase: Which is Better?

If you opt for a company car, you need to decide whether the company should purchase or lease.

Company Purchase

Advantages:

• 100% First Year Allowance for electric vehicles - full cost deductible against Corporation Tax immediately
• Own the asset long-term
• No mileage restrictions
• Potential residual value

Disadvantages:

• Large upfront capital requirement
• Depreciation risk
• VAT usually not recoverable (except on business-only vehicles)
• Maintenance costs are unpredictable

Company Lease (Business Contract Hire)

Advantages:

• No upfront capital required
• Fixed monthly costs including maintenance
• 50% VAT recovery on lease payments (if there is private use)
• 100% lease deduction for electric vehicles (no 15% restriction)
• Easy to upgrade regularly

Disadvantages:

• Mileage limits with excess charges
• No asset ownership
• Long-term commitment

Tax Comparison: Purchase vs Lease

Purchase gives a larger upfront tax benefit but requires significant capital. Leasing spreads the benefit and preserves cash.

Employer National Insurance Considerations

Do not forget that company cars trigger employer National Insurance on the BIK value. This is a real cost that reduces your company's profits.

Employer NI Impact by Car Type

For high-emission cars, employer NI alone can exceed £2,000 per year. For electric vehicles, it is minimal.

Total Company Cost Comparison

When comparing options, consider the total cost to your company:

Common Mistakes to Avoid

1. Forgetting Employer National Insurance on Company Cars

Many directors only consider their personal BIK tax when comparing options. The 15% employer NI on BIK value is a real cost that reduces company profits and ultimately your dividends.

2. Claiming Mileage Rates on a Company Car

If you have a company car, you cannot claim 45p/25p mileage rates. You can only claim the lower Advisory Fuel Rates (8-26p depending on fuel type and engine size). This is a common error that HMRC will investigate.

3. Poor Mileage Record Keeping

To claim mileage allowance, you need contemporaneous records of every business journey - date, destination, purpose, and miles. HMRC can request your mileage log during an enquiry. Without proper records, claims can be disallowed with penalties.

4. Accepting Company-Paid Private Fuel

If your company pays for private fuel (not just business fuel) on a petrol or diesel company car, you face an additional fuel benefit charge. For 2025/26, this is £27,800 multiplied by your BIK percentage. On a 30% BIK car, that is an extra £8,340 benefit, costing a higher-rate taxpayer £3,336 per year in tax. Almost always, paying for private fuel yourself is better.

5. Not Reviewing Annually

Your optimal choice depends on business mileage, personal circumstances, and vehicle type. Review your position each year. If you are switching to an EV, the calculation changes dramatically.

6. Assuming Car Allowance is Tax-Free

Some directors assume car allowance is treated like mileage payments. It is not - it is taxed as salary, making it typically the worst option for tax efficiency.

7. Choosing a Plug-in Hybrid Expecting 2% BIK

Only fully electric vehicles (0g/km) get the 2% rate. Plug-in hybrids have CO2 emissions and get 2-14% depending on electric range. A plug-in hybrid with 50 miles range still faces 8% BIK - four times more than a full EV.

8. Not Claiming Available Allowances

If you use your personal car for business but your company pays you less than the HMRC rates, you can claim tax relief on the difference through your Self Assessment. Many directors miss this.

Frequently Asked Questions

Can I claim 45p per mile if I have a company car?

No. The 45p/25p mileage rates (AMAP) are only for employees using their personal vehicles. If you have a company car, you can only claim reimbursement at the lower Advisory Fuel Rates (around 8-26p depending on fuel type and engine size) for business journeys where you paid for fuel yourself.

What if I do very few business miles?

If you do minimal business mileage, personal car ownership with mileage claims may not make financial sense - you receive little tax-free income but bear all vehicle costs yourself. A company car (especially electric) might be better as you get free private use for minimal tax, even if business use is low.

Is company car or mileage better for an electric vehicle?

For electric vehicles, company cars are often the better choice. The 2% BIK rate means you pay minimal tax (under £500/year on a £45k car) but the company provides the vehicle, insurance, road tax and potentially free workplace charging. With personal ownership and mileage claims, you receive more tax-free cash but must fund the expensive EV purchase yourself.

Can my spouse use my company car?

Yes, if your company policy permits it. The BIK calculation already assumes private use by you and your household, so there is no additional tax charge for family members using the car.

How does Working from Home affect mileage claims?

If you work primarily from home, travel to clients, temporary workplaces, or occasional office visits is generally claimable business mileage. However, if you have a permanent workplace, travel there is still a non-claimable commute. HMRC looks at the pattern of where you actually work, not just your contract.

What records do I need for mileage claims?

For each business journey, record:

• Date of travel
• Start and end points
• Business purpose
• Total miles driven

Keep these records for at least six years. HMRC can request them during an enquiry, and claims without supporting evidence can be disallowed.

Can I change from company car to mileage claims mid-year?

Yes, both BIK and mileage are calculated proportionally. If you have a company car for six months then switch to using your personal car, you pay BIK for the first six months and can claim mileage for business journeys in the second half. Make sure both arrangements are properly documented.

Does a company car affect my mortgage application?

Company cars can complicate mortgage applications because lenders treat BIK differently from salary. Some lenders include only a percentage of BIK value as income. This is worth discussing with your mortgage broker before deciding on a company car.

What about company vans?

Company vans have different (generally more favourable) tax treatment. The van benefit for 2025/26 is a flat £3,960 regardless of the van's value, plus £757 if private fuel is provided. Electric vans have zero benefit until April 2027. If your business needs a van rather than a car, electric is exceptionally tax-efficient.

How do I report company car tax to HMRC?

Your company must file a P11D form by 6 July after each tax year, reporting all benefits in kind including company cars. The BIK value is then collected through your tax code (adjusting your PAYE) or through Self Assessment if you complete a tax return.

How AccountsOS Helps with Vehicle Decisions

Choosing between company car, mileage claims, and car allowance involves complex calculations that change based on your specific mileage, tax rate, and vehicle choices. AccountsOS automates this analysis.

Mileage Tracking and Claims

• Log business journeys quickly with voice commands or simple entries
• Automatic calculation of claimable amounts at correct HMRC rates
• Generate mileage reports ready for year-end tax returns or HMRC enquiries

Company Car BIK Monitoring

• Input your company car details once
• BIK values calculated automatically based on current rates
• Track employer NI liabilities alongside your personal tax cost
• P11D information ready for reporting

Decision Analysis

Ask questions in plain English and get instant, tailored answers:

• "Should I get a company car or claim mileage on my Audi?"
• "How much would I save switching to an electric company car?"
• "Compare a £500 car allowance with mileage claims at 12,000 miles"
• "What's my total vehicle tax cost this year?"

Corporation Tax and VAT

• Track all vehicle-related expenses for accurate profit calculation
• Calculate VAT recovery on lease payments
• Ensure capital allowances are correctly claimed
• Monitor the impact of vehicle decisions on your overall tax position

AccountsOS analyses your actual situation - your mileage patterns, tax rate, company profits - and recommends the approach that puts more money in your pocket.

Conclusion: Making the Right Choice

For UK limited company directors in 2025/26, the vehicle decision comes down to one key question: are you going electric?

If you are keeping a petrol or diesel car: Claim mileage on your personal vehicle. The 45p/25p rates provide substantial tax-free income, and company cars trigger BIK rates of 15-37% that create thousands in annual tax.

If you are considering an electric vehicle: Seriously evaluate a company car. The 2% BIK rate means you pay just a few hundred pounds per year in tax for unlimited private use of a premium EV, while the company gets Corporation Tax relief and handles all running costs.

Avoid car allowances unless you have specific reasons. The full salary tax treatment makes them the least efficient option in almost all scenarios.

The numbers favour action:

Review your vehicle arrangements annually. As electric vehicles become more practical and charging infrastructure improves, the case for an electric company car strengthens each year.

Ready to optimise your vehicle tax position? AccountsOS calculates exactly which option saves you the most based on your actual mileage, tax rate, and preferred vehicles. Ask us "What's the best vehicle strategy for me?" and get an instant, personalised analysis. See how it works and start your free trial today.