Is Car Allowance Pensionable?

This article aims to help in answering the question of whether or not a car allowance is a pensionable form of income for employees. As we discuss this topic in the following paragraphs, we will explore how car allowance is treated in financial terms, how it is calculated and if it is subject to taxes. We will also explore pensionable incomes and review earnings that can be classed as pensionable pay.

Is Car Allowance Pensionable?

No car allowance is not pensionable. 

Pensionable pay or allowances are payments received by employees for their services which can contribute towards their workplace pension scheme. Each month, employers deduct a certain amount from pensionable pay or allowances to contribute towards this scheme which serves as the pension pot for employees on their retirement.

Meanwhile, a company car allowance is a cash benefit that an employer provides to an employee to enable them in purchasing a vehicle of their own through the financial support of the organisation they work for. It serves as a motivation, and staff retention tool and is usually extended to staff members instead of being offered a company car.

Similarly, if you receive a mileage allowance in addition to a car allowance, this is also a non-pensionable income as it is a reimbursement given to employees to cover their business or travel-related expenses. 

In addition to these, the below-listed allowances are non-pensionable as well:

  • salary in place of notice
  • salary against loss of holidays
  • salary as an inducement not to leave 
  • salary regarding the loss of future pensionable payments or benefits
  • salary for being on reserve force leave
  • amount paid in lieu of the monetary value of a car
  • amounts with no tax liability determined
  • award(s) of compensation to achieve equal pay
  • travelling or subsistence allowances

Which Incomes Are Included In A Pensionable Pay?

Pensionable pay includes the following forms of remuneration:

  • salary or wages
  • bonuses
  • overtime
  • commissions
  • shift allowance
  • earnings from working additional hours by part-time workers
  • maternity, paternity, adoption and shared parental pay
  • any other taxable benefits categorised as pensionable in an employee contract

According to the Pensions Act 2008, employers are required to offer a pension scheme to all employees who meet the following criteria:

  • classed as a “worker’
  • aged between 22 years and State Pension age
  • earning at least £10,000 per year
  • ordinarily working in the UK

How Are Pensionable Earnings Calculated?

Pensionable earnings are calculated based on contributions made by employers and employees.

The minimum threshold is 5% contribution by employees and 3% contribution by the employer. Pensionable earnings include the following sources of income:

  • Basic pay
  • Qualifying earnings
  • Total earnings

For this, an employer needs to enrol employees for pensionable pay by following these steps:

  • register a suitable pension scheme 
  • assess staff eligibility 
  • enrol employees and make contributions
  • maintain the auto-enrolment
  • keep records on how effectively employees fulfil their responsibilities

If you are looking for advice on pension schemes, you should visit Pension Wise for free pension guidance.

How Does Car Allowance Work?

Car allowance is added to the annual salary of an employee and they are required to use it for the purpose it is intended for, that is, purchasing a vehicle.

Employees who receive car allowance are expected to manage the following vehicle-related expenses:

  • service costs
  • insurance
  • maintenance costs
  • Ministry of Transport (MOT) costs
  • repairs

According to a recent survey, the average rate for a car allowance in the UK is classified based on an organisation hierarchy as follows:

  • company heads, directors & c-suite individuals receive an average amount of £10,300 
  • senior managers receive an average amount of £8,200 
  • middle managers receive an average amount of £6,500 
  • sales representatives receive an average amount of £5,200 
  • professionals receive an average amount of £4,600 

A car allowance is a taxable income which is taxed in the same way and at the same rate at which the regular income of the recipient is taxed.

Is Car Allowance Taxable?

Yes, car allowance is a taxable income. 

Your car allowance is simply added to your existing income (after deduction of Personal Allowance) and your tax band is applied depending on whether you belong to the basic, higher or additional tax rate band. 

When a non-cash benefit such as a company car is given to an employee, the taxable amount depends on several factors, which include the following:

  • CO2 emissions of the vehicle
  • year of make and model of the vehicle
  • the list price of the vehicle including accessories; less capital contribution
  • type of fuel it consumes
  • frequency of use of the vehicle

When tax is calculated on a company car, its taxable value is taken into consideration. This can be done in either of the following two ways:

  • Calculate the cash equivalent of the benefit and add it to the salary of the employee. Then tax the amount through payroll. 
  • Use a P11D form to declare the car’s value versus the taxes paid to date.

How Does Car Allowance Benefit Employees?

A company car allowance benefits an employee in the following ways:

  • It allows the freedom to choose a vehicle (unless restricted by the company)
  • It gives flexibility in choosing a finance method
  • The vehicle remains with the employee even after they leave the company
  • Despite being an additional sum of money, car allowance remains a non-pensionable part of their income

However, a company car allowance restricts employees in some ways. Since car allowance is taxed at source, the amount of income tax that is deducted from your income determines the amount of car allowance available to you. This is the reason why company employees who are high taxpayers will find themselves better off with a company car than a car allowance.

Furthermore, unlike a company car that is paid for and maintained by the employer, an employee has to finance the purchase and maintenance of a vehicle bought with a car allowance.


The above discussion has helped to conclude that car allowance is not pensionable despite being a cash benefit added to one’s income. However, there are other incomes including (but not limited to) bonuses, commissions and overtime that can serve as pensionable pay and be used to contribute to one’s pension pot.


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