What Is Car Allowance?

Car allowance is a company car scheme where an employer provides employees with monetary benefits, instead of company-owned cars. The car allowance is supplied on a monthly, quarterly or annual basis and is meant to help employees purchase or lease a vehicle or maintain the one they already own.

The car allowance scheme provides employees with more freedom of choice over the vehicle they drive, instead of having to use one provided by their workplace.

If you receive a car allowance, the amount is normally specified on your work contract and is paid out with your salary. Car allowance is considered a benefit and is taxed on par with your regular income.

Looking for more information on car allowances? See our guide to car allowances for employees in the US, and to car allowance for employees in Australia.

How does a car allowance work?

While your employer generally provides a car allowance so you are able to purchase a vehicle if you don’t have one, you can also use the sum to maintain or improve your current vehicle.

Since the car allowance is a benefit and not a reimbursement for business-related expenses, you don’t need to provide proof of how you spend it. So, do with the money as you wish - buy or lease a vehicle, maintain your own, or spend it on other personal expenses.

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You can still receive reimbursement for your business-related driving

If you receive a car allowance, you are still eligible for having your work-related mileage reimbursed tax-free at the standard tax office rates. In case your employer doesn’t additionally reimburse you for your business mileage, you may be able to claim mileage deductions on your annual tax return.

See more information about reimbursements and claims for your business-related driving expenses:

ATO mileage guide for Australia
CRA mileage guide for Canada
HMRC mileage guide for the United Kingdom
IRS mileage guide for the United States

FAQ

How is a car allowance taxed?

A car allowance is considered a benefit, is provided with your monthly remuneration and will be taxed together with your salary as a part of your income.

What does a car allowance cover?

A car allowance is provided by your employer and is meant to cover the purchase or lease of a vehicle you can use for business and personal purposes or cover the maintenance of your current vehicle that you will be using for business-related driving.

Is a car allowance considered income?

Yes, a car allowance is considered a part of your income, as it is a benefit scheme and not reimbursement provided for eligible business-related expenses you’ve had.