What is a car allowance?

A car allowance is an extra payment made to you by your employer that’s designed to cover car expenses you incur as part of your job. It’s sometimes used as an alternative to giving employees a company car.

The idea is that it’s simpler for businesses to have staff use their own vehicles and then cover their work-related expenses, than it is to manage a fleet of company cars.

A car allowance is different to an expense reimbursement, because it’s not necessarily based on actual costs. Instead, it’s generally a fixed amount that’s based on what costs you are likely to incur while using your personal vehicle.

How much should a car allowance be in 2026?

A car allowance should adequately cover an individual’s work-related car running costs, so a percentage of the employee’s total car costs, which for the average Aussie are around $23,555 per year in 2026.

In major capital cities, like Sydney, this figure climbs as high as $29,485. These averages are according to the Australian Automobile Association and include car repayments, fuel, insurance, registration, CPT licensing, maintenance, roadside assist and tolls, but excludes any vehicle depreciation.

Naturally, a car allowance is typically estimated to reflect actual costs the employee is likely to incur while doing their job, rather than an average. That means it will vary based on how much the employee uses their car and for what purpose.

Some companies may have a set policy that each car allowance is based on (e.g. according to estimated mileage) or it may be calculated on a case by case basis.

Given rising fuel and insurance costs in 2026, many companies will be reviewing how they compensate employees who use their personal car for work.

Is a car allowance taxable income?

Yes, according to the ATO a car allowance is generally taxed alongside your salary at the regular income tax rates. In other words, it increases your taxable income which is one of the ways it differs from the other main way an employer can help an employee with their car costs – a novated lease.

Car allowance versus novated lease: how are they different

A car allowance and a novated lease both perform a similar function for employers and employees: allowing you to cover car expenses through your salary. However, they are very different in terms of how they work.

In a nutshell, a car allowance is extra (taxable) income on top of your salary designed to cover work-related car costs. You may be able to claim a tax deduction on actual car expenses your car allowance is used to cover, according to the ATO.

By contrast, a novated lease allows you to pay for your car and running costs using your pre-tax salary, meaning it lowers your taxable income and saves you on tax.

You can get a novated lease either on a car that’s used for a mixture of work and personal use, or solely personal use.