Company Car vs Mileage Allowance: Which Saves You More Tax?
Compare company car benefit in kind vs mileage allowance for UK limited company directors. Calculate which option saves more tax with worked examples for petrol, diesel and electric vehicles.
As a UK limited company director, choosing between a company car and claiming mileage allowance on your personal vehicle is one of the most significant tax decisions you will make. The wrong choice could cost you thousands in unnecessary tax each year.
For most directors in 2025/26, claiming mileage allowance on your personal car wins hands down - unless you are driving an electric vehicle. The generous HMRC mileage rates combined with zero benefit in kind tax make personal car ownership far more tax-efficient for petrol and diesel drivers. However, the 2% BIK rate for electric vehicles has completely changed the equation, making company EVs genuinely attractive for high-mileage directors.
Quick Comparison: Company Car vs Mileage Allowance
Before diving into the detail, here is a high-level comparison of both options.
| Factor | Company Car | Mileage Allowance |
|---|---|---|
| Who owns the car | Company | You personally |
| Tax treatment | Benefit in Kind (BIK) taxed on you | No tax - claim tax-free mileage |
| HMRC rates | P11D value x CO2% x tax rate | 45p/mile (first 10k), 25p/mile after |
| Employer NI | 15% on BIK value | None |
| Best for | Electric vehicles, high earners wanting simplicity | Petrol/diesel, most business mileage levels |
| Record keeping | Company handles everything | You must track all business journeys |
| Private use | Included (but taxed) | Not covered by mileage allowance |
How Company Car Tax Works (Benefit in Kind)
When your company provides you with a car for private use, HMRC treats this as a taxable benefit - a "benefit in kind" or BIK. You pay income tax on the calculated benefit value, and your company pays employer National Insurance on the same amount.
The BIK Calculation Formula
Company car tax is calculated using three factors:
BIK Value = P11D Value x CO2 Percentage x Your Tax Rate
Where:
- P11D Value = The list price of the car including options, delivery and VAT, minus the first year registration fee and road tax
- CO2 Percentage = A percentage based on the car's CO2 emissions (see table below)
- Your Tax Rate = 20% (basic rate), 40% (higher rate), or 45% (additional rate)
BIK Rates for 2025/26 by CO2 Emissions
The CO2-based percentages for 2025/26 are:
| CO2 Emissions (g/km) | Electric Range | BIK Rate |
|---|---|---|
| 0 | N/A | 2% |
| 1-50 | 130+ miles | 2% |
| 1-50 | 70-129 miles | 5% |
| 1-50 | 40-69 miles | 8% |
| 1-50 | 30-39 miles | 12% |
| 1-50 | Under 30 miles | 14% |
| 51-54 | N/A | 15% |
| 55-59 | N/A | 16% |
| 60-64 | N/A | 17% |
| 65-69 | N/A | 18% |
| 70-74 | N/A | 19% |
| 75-79 | N/A | 20% |
| 80-84 | N/A | 21% |
| 85-89 | N/A | 22% |
| 90-94 | N/A | 23% |
| 95-99 | N/A | 24% |
| 100-104 | N/A | 25% |
| 105-109 | N/A | 26% |
| 110-114 | N/A | 27% |
| 115-119 | N/A | 28% |
| 120-124 | N/A | 29% |
| 125-129 | N/A | 30% |
| 130-134 | N/A | 31% |
| 135-139 | N/A | 32% |
| 140-144 | N/A | 33% |
| 145-149 | N/A | 34% |
| 150-154 | N/A | 35% |
| 155-159 | N/A | 36% |
| 160+ | N/A | 37% |
Example: A BMW 3 Series with a P11D value of £40,000 and CO2 emissions of 120g/km has a BIK rate of 29%.
- BIK value = £40,000 x 29% = £11,600
- Tax for basic rate taxpayer (20%) = £2,320 per year
- Tax for higher rate taxpayer (40%) = £4,640 per year
Employer National Insurance on Company Cars
Your company must also pay 15% employer National Insurance on the BIK value - a cost many directors overlook.
Using the same BMW example:
- Employer NI = £11,600 x 15% = £1,740 per year
This is a real cost to your company, reducing the net benefit of the company car arrangement.
Fuel Benefit if Company Pays for Private Fuel
If your company pays for fuel you use for private journeys (not just business), there is an additional fuel benefit charge. For 2025/26, the fuel benefit multiplier is £27,800.
Fuel Benefit = £27,800 x CO2 Percentage
For our BMW example (29% BIK rate):
- Fuel benefit = £27,800 x 29% = £8,062
- Additional tax at 40% = £3,225 per year
This makes company-paid private fuel extremely expensive for high-emission cars. Most directors choose to pay for private fuel themselves and only have business fuel reimbursed.
How Mileage Allowance Works
The alternative to a company car is using your personal vehicle for business journeys and claiming mileage allowance from your company. This is known as the Approved Mileage Allowance Payment (AMAP).
HMRC Mileage Rates 2025/26
| Miles in Tax Year | Rate per Mile |
|---|---|
| First 10,000 miles | 45p |
| Over 10,000 miles | 25p |
These rates are designed to cover all vehicle running costs:
- Fuel
- Insurance
- Road tax
- MOT and servicing
- Depreciation
- Wear and tear
Tax Treatment of Mileage Allowance
The mileage payments you receive from your company are completely tax-free - no income tax, no National Insurance. Your company can also claim Corporation Tax relief on the payments.
Example: You drive 12,000 business miles in a year.
- First 10,000 miles at 45p = £4,500
- Remaining 2,000 miles at 25p = £500
- Total tax-free payment: £5,000
What Qualifies as Business Mileage
You can claim mileage for:
- Travel to clients, customers or temporary workplaces
- Trips between business locations
- Travel to suppliers, meetings or business events
- Site visits and property viewings
- Conferences and training courses
You cannot claim for:
- Your regular commute from home to a permanent workplace
- Personal journeys
- Travel that would have happened regardless of business need
For detailed guidance on allowable mileage and other expenses, see our complete guide to allowable business expenses.
Record Keeping Requirements
To claim mileage allowance, you must maintain accurate records of every business journey. For each trip, record:
- Date of journey
- Start and end locations
- Purpose of the journey
- Total miles travelled
HMRC may request to see your mileage log during an enquiry. Without proper records, your claims could be disallowed.
Use our mileage calculator to work out your potential claims.
Worked Examples: Company Car vs Mileage
Let us compare both options across three realistic scenarios to see which delivers better value.
Scenario 1: Petrol Car, 15,000 Business Miles
Vehicle: £30,000 petrol car, 130g/km CO2 Annual business miles: 15,000 Tax status: Higher rate taxpayer (40%)
| Company Car | Mileage Allowance | |
|---|---|---|
| P11D value | £30,000 | N/A |
| BIK rate | 30% | N/A |
| BIK value | £9,000 | N/A |
| Your tax (40%) | £3,600 | £0 |
| Employer NI (15%) | £1,350 | £0 |
| Mileage payment | N/A | £5,750* |
| Total tax cost | £4,950 | £0 |
*Mileage: (10,000 x 45p) + (5,000 x 25p) = £4,500 + £1,250 = £5,750 tax-free
Winner: Mileage Allowance - You save £4,950 in tax and receive £5,750 tax-free to cover your running costs.
Scenario 2: Diesel Car, 8,000 Business Miles
Vehicle: £40,000 diesel car, 145g/km CO2 Annual business miles: 8,000 Tax status: Higher rate taxpayer (40%)
| Company Car | Mileage Allowance | |
|---|---|---|
| P11D value | £40,000 | N/A |
| BIK rate | 34% | N/A |
| BIK value | £13,600 | N/A |
| Your tax (40%) | £5,440 | £0 |
| Employer NI (15%) | £2,040 | £0 |
| Mileage payment | N/A | £3,600* |
| Total tax cost | £7,480 | £0 |
*Mileage: 8,000 x 45p = £3,600 tax-free
Winner: Mileage Allowance - You save £7,480 in combined tax costs. Even with lower mileage, the personal car approach is far superior for diesel vehicles.
Scenario 3: Electric Car, 12,000 Business Miles
Vehicle: £45,000 electric car, 0g/km CO2 Annual business miles: 12,000 Tax status: Higher rate taxpayer (40%)
| Company Car | Mileage Allowance | |
|---|---|---|
| P11D value | £45,000 | N/A |
| BIK rate | 2% | N/A |
| BIK value | £900 | N/A |
| Your tax (40%) | £360 | £0 |
| Employer NI (15%) | £135 | £0 |
| Mileage payment | N/A | £5,000* |
| Total tax cost | £495 | £0 |
*Mileage: (10,000 x 45p) + (2,000 x 25p) = £4,500 + £500 = £5,000 tax-free
Winner: It depends. The company car only costs £495 in total tax, while you would receive £5,000 tax-free with mileage allowance.
However, with a company car:
- Your company can reclaim VAT on lease payments (up to 50% for cars with private use)
- You get free private use for just £360/year in tax
- Your company handles insurance, maintenance and road tax
- No capital outlay required from you personally
For electric vehicles, the company car option becomes genuinely competitive - especially for directors who value simplicity and want unlimited private use for minimal tax.
Why Electric Vehicles Change Everything
The 2% BIK rate for electric vehicles makes company cars attractive again for the first time in years. Consider the numbers:
| Car Value | Petrol BIK (30%) | Electric BIK (2%) | Tax Saving (40% taxpayer) |
|---|---|---|---|
| £35,000 | £10,500 | £700 | £3,920/year |
| £45,000 | £13,500 | £900 | £5,040/year |
| £60,000 | £18,000 | £1,200 | £6,720/year |
A £45,000 electric company car costs a higher-rate taxpayer just £360 per year in tax, compared to £5,400 for an equivalent petrol car.
Additional EV Benefits
Beyond the low BIK rate, electric company cars offer:
- Free workplace charging - Your company can provide free charging at work with no taxable benefit
- Home charging equipment - The company can pay for home charger installation (though this became taxable from April 2025 for new installations)
- No fuel benefit charge - Since there is no petrol/diesel, the fuel benefit does not apply to electricity
- Lower running costs - Electricity is cheaper than petrol/diesel per mile
- Road tax savings - Zero VED for electric vehicles
EV Company Car vs Personal EV
Even compared to owning your personal EV and claiming mileage, the company car often wins:
Personal EV with 12,000 business miles:
- Mileage claim: £5,000 tax-free
- But you paid for the car (potentially £40k+), insurance, road tax and maintenance yourself
Company EV:
- Tax cost: £360/year (on £45k car at 40%)
- Employer NI cost: £135/year
- Company pays for vehicle, insurance, maintenance, road tax
- Free charging at work
- Unlimited private use
The company car delivers far more value despite the small tax charge.
Decision Framework: When to Choose Each Option
Choose Mileage Allowance When:
- You drive a petrol or diesel car
- You prefer flexibility (can change cars anytime)
- Your business mileage varies significantly year to year
- You want to keep your car arrangements completely personal
- You already own a suitable vehicle
- Your company has limited cash flow for car purchases/leases
Choose a Company Car When:
- You are getting an electric vehicle (2% BIK is exceptional value)
- You want simplicity - company handles everything
- You have high personal mileage and want unlimited private use
- Your company has strong cash flow or existing fleet arrangements
- You are a basic rate taxpayer (lower BIK tax impact)
- You do not want capital tied up in a personal vehicle
Consider a Hybrid Approach
Some directors take a company electric car for commuting and local journeys, while maintaining a personal car for longer trips where range anxiety might be a concern. This captures the EV tax benefits while maintaining flexibility.
Corporation Tax Implications
Both options provide Corporation Tax relief for your company, but in different ways:
Company Car:
- Lease payments are deductible (100% for EVs, restricted for higher emission cars)
- Running costs (insurance, maintenance, fuel) are deductible
- Capital allowances on purchase (100% for EVs via First Year Allowance)
Mileage Allowance:
- Full mileage payments are deductible as employee expenses
- Simple and straightforward
For electric vehicles, the combination of 100% first-year capital allowances (for purchase) or unrestricted lease deductions plus the employee's 2% BIK makes company ownership highly tax-efficient overall.
Common Mistakes to Avoid
1. Forgetting Employer NI on Company Cars
Many directors compare only their personal tax on BIK versus mileage. Remember your company pays 15% employer NI on top - this is real money that could otherwise be profit or your dividend.
2. Poor Mileage Records
If you claim mileage allowance, HMRC may ask to see your records. Vague estimates or missing logs could result in disallowed claims and potential penalties. Track every journey as it happens.
3. Claiming Company Car AND Mileage
You cannot claim the 45p/25p mileage rates for business journeys in your company car. If you have a company car and use it for business travel, you can only claim actual fuel costs for business miles (typically around 15-20p per mile depending on the car).
4. Ignoring the Fuel Benefit Trap
Accepting company-paid private fuel sounds attractive until you see the tax bill. For most petrol and diesel cars, paying for private fuel yourself saves thousands in tax.
5. Not Reviewing Annually
Your optimal choice may change. If fuel prices spike, if you change your mileage patterns, or if you are considering switching to an EV - review your car tax position each year.
How AccountsOS Helps Track Vehicle Expenses
Whether you choose a company car or mileage allowance, AccountsOS makes tracking and compliance effortless.
Automatic Mileage Tracking
- Log business journeys with start/end locations
- AI automatically calculates claimable amounts at correct HMRC rates
- Generate mileage reports for tax returns and HMRC enquiries
Company Car Management
- Track BIK values and P11D reporting
- Monitor employer NI liabilities
- Calculate optimal salary/dividend split accounting for BIK (see our salary vs dividends guide)
Ask Questions in Plain English
- "How much mileage can I claim this quarter?"
- "What's my company car tax costing me?"
- "Should I switch from my diesel to an electric company car?"
AccountsOS analyses your specific situation and provides instant, actionable answers.
Frequently Asked Questions
Can I claim mileage if I already have a company car?
No, not at the standard 45p/25p rates. If you have a company car, you can only claim actual fuel costs for business miles - typically an advisory fuel rate of around 12-16p per mile depending on engine size and fuel type. The 45p rate is specifically for employees using their own vehicles.
What if I only do a few hundred business miles per year?
Mileage allowance almost certainly wins. Even at low mileage, you receive tax-free payments with zero BIK exposure. A company car would cost you in BIK tax regardless of how little business use the vehicle gets.
Can my spouse use the company car?
Yes, if your company permits it. However, 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.
Do I pay BIK on a company van?
Company vans have different (and generally more favourable) tax treatment. For 2025/26, the van benefit charge is a flat £3,960 regardless of the van's value, plus £757 if private fuel is provided. Electric vans have zero benefit charge until April 2025.
Can I salary sacrifice for an electric car?
Yes, salary sacrifice for electric cars is increasingly popular. You give up some gross salary in exchange for an EV, paying only 2% BIK on the car's value. This can be more tax-efficient than buying personally, especially for higher earners. Many leasing companies offer salary sacrifice schemes specifically for EVs.
What happens if I change cars mid-year?
Both BIK and mileage allowance are calculated proportionally. If you have a company car for six months, you pay BIK for six months. If you switch from company car to personal car, you start tracking mileage from the switch date.
Are electric car charging costs covered by mileage allowance?
Yes, the 45p/25p rates apply to all vehicles including electric. However, since electricity costs are much lower than petrol per mile, you may find the mileage rates actually give you a surplus on an EV - another reason personal EV ownership with mileage claims can work well.
How do I report company car tax to HMRC?
Your company must file a P11D form by 6 July after the end of each tax year, reporting all benefits in kind including company cars. The BIK value is then included on your personal tax return and collected through your tax code (for employees) or Self Assessment.
Conclusion: Making the Right Choice
For UK limited company directors in 2025/26:
Petrol and diesel cars: Claim mileage allowance on your personal vehicle. The tax savings are substantial - often several thousand pounds per year compared to a company car.
Electric vehicles: Seriously consider a company car. The 2% BIK rate, combined with unlimited private use, free workplace charging and zero capital outlay makes company EVs exceptionally good value.
Hybrids: Plug-in hybrids with good electric range (70+ miles) benefit from 5% BIK, making them a reasonable middle ground if you are not ready for full electric.
The right choice depends on your specific mileage, vehicle preferences and whether the simplicity of a company-managed vehicle outweighs the tax efficiency of personal ownership.
Use our company car tax calculator to model your exact situation, or explore our mileage calculator to see how much you could claim on your personal vehicle.
Ready to optimise your vehicle expenses? AccountsOS tracks your mileage, calculates your claims and ensures you are always getting the best tax outcome. See how it works and start your free trial today.
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