A cash car allowance is pay. It goes through the payroll, it is taxed as earnings, and it attracts Class 1 National Insurance from both employee and employer — which is why an employer paying £6,000 a year in allowances is also paying 15% employer National Insurance on top of it. What many employers do not realise is that part of that National Insurance may not have been due at all, where the employee also drives business miles and is reimbursed at less than the approved rate.
Why a car allowance is treated as earnings
A company car is a benefit in kind: no National Insurance for the employee, Class 1A for the employer, and a taxable value driven by list price and emissions. A cash allowance is not a benefit at all — it is money, paid as part of the remuneration package, and it is therefore earnings for both income tax and Class 1 National Insurance in the ordinary way.
That difference is the whole reason the two options need modelling rather than assuming. For a low-emission or electric vehicle the company car has become dramatically the cheaper route, because the benefit charge is small and there is no employee National Insurance. For a higher-emission vehicle, or where the employee wants ownership and flexibility, the allowance frequently wins even after National Insurance. The answer changes with the car, the employee's marginal rate and the mileage — which is why fleet policies written five years ago are usually wrong now.
The National Insurance relief employers miss
National Insurance has its own rules for motoring, and they do not mirror the income tax rules. Where an employee uses their own car for business travel, payments in respect of that use are relevant motoring expenditure, and the earnings liable to Class 1 National Insurance can be reduced by the qualifying amount — broadly, business miles multiplied by the approved mileage rate — to the extent the employee has not already been reimbursed at that level.
One detail in that calculation is worth money and is routinely missed: the National Insurance rate does not step down after 10,000 miles. For 2026/27 the qualifying amount uses 55p for every business mile, where the income tax calculation drops to 25p above 10,000. A high-mileage employee therefore has a much larger qualifying amount for National Insurance than their income tax mileage claim would suggest, and an employer running one calculation for both purposes is understating the relief.
The consequence: where an employer pays a cash allowance and reimburses business mileage at less than the approved rate (a common arrangement, particularly where fuel-only rates are used), part of the allowance can be treated as covering the shortfall and taken out of the National Insurance calculation. Employers who have never applied this have frequently overpaid employer National Insurance — and employees theirs — across every year still in time.
This is not a loophole; it is how the legislation is structured, and the principle has been confirmed through litigation brought by large employers. But it is fact-dependent: it requires genuine business mileage, records to evidence it, and a payment structure that can properly be characterised as relating to the use of the employee's own car. An allowance paid to everyone at a grade regardless of whether they drive anywhere does not qualify.
Getting the mileage side right
The approved mileage allowance payments regime is the anchor for all of this. Reimbursement up to the approved rate is free of tax and National Insurance and needs no reporting. Reimbursement above it is taxable earnings on the excess. Reimbursement below it leaves the employee able to claim mileage allowance relief for the shortfall against income tax — and leaves the employer with the National Insurance position described above.
Three records make the whole thing defensible: business mileage by employee, by journey, with purpose; the rate actually paid; and the allowance paid. Employers who hold the first two usually find the analysis straightforward. Employers who reimburse a round monthly sum with no mileage log have neither the relief nor the evidence to claim it.
The practical review
Four questions are worth asking of any car allowance policy:
- Is the allowance genuinely linked to business use, or is it a salary supplement by another name? The answer determines whether any National Insurance relief is available;
- What mileage rate is actually paid, and does it sit below the approved rate? If so, quantify the qualifying amount across the workforce and the open years;
- Is the record-keeping sufficient to support a claim, and if not, what would it take to be? Prospective fixes are cheap; retrospective ones rarely work;
- Does the car-versus-allowance choice still hold for each population, given where benefit rates for electric and low-emission vehicles now sit against employer National Insurance at 15%?
The last one is where most of the money is for employers with fleets. The tax treatment of company cars has moved further and faster than most remuneration policies, and a review that compares the real after-tax cost of each route for a typical employee usually changes the policy.
Acumon reviews car policies, mileage arrangements and the National Insurance treatment through employment tax work, and handles the reporting through payroll management — with the benefit in kind side covered in our guides to P11Ds and electric company cars. If you pay car allowances and reimburse mileage below the approved rate, that combination is worth quantifying.