Company Car vs Travel Allowance: Which Actually Costs Less in Tax

Deciding whether to give a director or senior employee a company car or a travel allowance instead is a genuinely common question for a growing small business, and the honest answer is that neither option wins outright — the better choice depends on how the vehicle is actually used, and getting the mechanics wrong in either direction costs real money.

Company car: taxed as a fringe benefit, regardless of actual use

Where the employer provides and owns the vehicle, the employee is taxed on a fringe benefit calculated as a fixed percentage of the vehicle's determined value (broadly, its original cost including VAT) each month, under paragraph 7 of the Seventh Schedule to the Income Tax Act:

• 3.5% per month of the determined value, as the standard rate.
• 3.25% per month, if the vehicle was acquired subject to a genuinely qualifying maintenance plan — one that's a contractual obligation in the ordinary course of the provider's trade, covers maintenance costs comprehensively (excluding top-up fluids, tyres, or damage from abuse), runs for at least three years or 60,000 km (whichever comes first), and started at the same time the employer bought the vehicle. A maintenance plan added later, as a top-up, doesn't qualify for the reduced rate.

This taxable benefit applies regardless of how much of the actual driving is business versus private — the fixed percentage is charged on the vehicle's value, not calculated from actual kilometres, though an employee can subsequently reduce the taxed amount at assessment by claiming actual costs (licence fees, insurance, fuel, maintenance) they personally paid that relate to genuine private kilometres travelled.

Travel allowance: taxed differently, and logbook-dependent

Where the employee owns the vehicle and receives a monthly travel allowance instead, the default position is that 80% of the allowance is included for PAYE purposes each month — the withholding assumes meaningful private use unless proven otherwise. This can be reduced to 20% included for PAYE purposes if the employer is genuinely satisfied, based on real evidence, that the employee will use the vehicle at least 80% for business purposes during the tax year.

Regardless of which withholding rate applied during the year, the actual tax liability is only finalised at annual assessment, based on the employee's actual documented business kilometres — which is exactly why a properly maintained logbook matters enormously here. Without one, SARS deems a high proportion of use to be private by default, materially reducing what the employee can claim back; with an accurate, contemporaneous logbook showing genuine business kilometres, the employee's actual deduction can be considerably larger.

Which one actually costs less: it depends on the driving pattern

As a general pattern: an employee genuinely doing a high volume of business travel tends to come out ahead with a travel allowance, since they can deduct a meaningful portion of the allowance against real business kilometres, particularly with a properly kept logbook. An employee whose actual use is mostly private, with only occasional genuine business trips, is often better off — or at least no worse off — under the company car's fixed fringe benefit calculation, since a travel allowance's tax treatment assumes and rewards heavy business use specifically. There is no universally correct answer independent of the actual usage pattern, and structuring this decision without genuinely projecting the person's real driving habits is exactly how a business ends up choosing the more expensive option for no real reason.

The logbook: the single most important document in either scenario

Whether reducing a company car's taxable fringe benefit or supporting a travel allowance deduction, an accurate, contemporaneous logbook — recording the date, distance, and purpose of each business trip as it happens, not reconstructed from memory months later — is the document that actually protects the real tax position. SARS's own published logbook template exists precisely because this record is what substantiates a reduced taxable amount at assessment; without it, both the company car and travel allowance routes default to considerably less favourable treatment.

Getting the decision right for a specific role

• Genuinely project the actual usage pattern — a sales role doing significant daily business travel is a different calculation from an office-based director who occasionally drives to client meetings.
• Insist on a proper logbook from day one, regardless of which structure is chosen — this is the document that actually determines the real-world tax outcome, not an optional extra.
• Reassess periodically, particularly if a role's travel demands genuinely change — a structure that made sense when someone was travelling constantly may no longer fit if their role becomes more office-based, or vice versa.

Sources: SARS's published guidance and the Seventh Schedule to the Income Tax Act 58 of 1962 (paragraph 7's 3.5%/3.25% company vehicle fringe benefit rates and qualifying maintenance plan conditions, corroborated against SARS Interpretation Note 72) and SARS's Guide for Employers in respect of Allowances (the 80%/20% travel allowance PAYE inclusion rule, effective 1 March 2026, and the logbook-dependent final assessment). This is general information, not tax advice — a business structuring a company car or travel allowance for a specific role should run the actual numbers with an accountant based on that person's real driving pattern, rather than defaulting to whichever option seems simpler to administer.

A worked example

A business is deciding how to structure vehicle benefits for two different roles. A field sales representative genuinely drives extensively for client visits across the region, spending the large majority of their vehicle use on business travel — for this role, a travel allowance with a rigorously maintained logbook is likely to produce a meaningfully lower tax burden than a company car's fixed fringe benefit, precisely because the actual business-use proportion is high. A finance director, by contrast, uses their vehicle mostly for the daily commute and occasional client lunches, with genuine business travel a small fraction of total use — for this role, the company car's flat 3.5%/3.25% fringe benefit, unaffected by the actually low proportion of business driving, may work out no worse and considerably simpler to administer than a travel allowance that would default to the less favourable 80% PAYE inclusion given the real usage pattern.

Frequently asked

Does the fringe benefit rate change if the employee also pays something toward the vehicle themselves? Yes, in principle — an employee's own genuine contribution toward the cost of the vehicle can reduce the taxable fringe benefit, though the specific mechanics depend on how the arrangement is structured and should be confirmed with an accountant.

Is a travel allowance the same as a reimbursive travel payment? No — a travel allowance is a fixed regular amount, taxed as described above; a reimbursive payment specifically reimburses actual documented business kilometres at a set rate per kilometre and is treated differently for PAYE purposes, generally more favourably where it genuinely reflects only real business travel.

Can a business simply choose whichever option is cheaper for the business itself, ignoring the employee's own tax position? The business's own cost (vehicle purchase and running costs versus a cash allowance) is a real consideration, but the employee's after-tax outcome matters too for a genuinely attractive package — a structure that minimises the business's cost while significantly disadvantaging the employee's own tax position isn't necessarily the wisest overall choice for retention.

What happens if an employee's actual business-use percentage turns out different from what was projected? The final tax position is settled at assessment based on actual documented kilometres, regardless of what was assumed for monthly PAYE withholding purposes — a genuine mismatch between projection and reality gets corrected (potentially resulting in additional tax owed or a refund) once the real numbers are known.

Does this apply the same way to a sole director of their own small company? Yes — a director receiving a company car or travel allowance from their own company is subject to the same fringe benefit and PAYE rules as any other employee; being the owner doesn't change the underlying tax treatment.

Does the vehicle's fuel type or whether it's electric change the fringe benefit calculation? The core paragraph 7 calculation applies based on the vehicle's determined value regardless of fuel type, though specific incentives or treatment for electric and hybrid vehicles are an evolving area worth confirming current treatment for directly with an accountant if this is genuinely relevant to your fleet decision.

Should a business use a third-party payroll or fleet management provider to handle this correctly? For a business with multiple company vehicles or travel allowances across several employees, a payroll or fleet management provider experienced in these specific calculations can meaningfully reduce the risk of getting the fringe benefit or PAYE treatment wrong at scale, compared to manually tracking each employee's arrangement individually.