Car Allowance in New Zealand: What Employees Need to Know

If your job requires you to use your own vehicle for work, your employer will typically offer either a car allowance or reimburse you per kilometre driven. Both are designed to cover the cost of using your vehicle for work — but they work differently, and IRD treats them differently for tax purposes.

Understanding the distinction matters. Depending on how your employer structures the payment, you may be paying income tax on it or receiving it tax-free. This guide explains how each arrangement works, what IRD says about the tax treatment, and how to calculate a fair reimbursement.

If you're looking to compare car allowance benefits with company cars, read our other guide. 

What is a car allowance?

A car allowance is a fixed regular payment (usually weekly, fortnightly, or monthly) paid on top of your salary to cover the costs of using your own vehicle for work. It's intended to account for running costs like fuel, maintenance, tyres, insurance, and depreciation.

In New Zealand, you'll also see it referred to as a vehicle allowance or motor vehicle allowance. These terms all describe the same arrangement. It's distinct from a company car, where your employer owns the vehicle and makes it available to you, and distinct from a per-kilometre reimbursement, where you're paid based on actual distances driven.

Employers tend to offer flat car allowances when an employee's driving patterns are reasonably predictable — for example, a sales rep who consistently visits clients across a region each week.

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How is car allowance taxed in NZ

Flat car allowance 

A flat car allowance is treated as taxable income. It gets added to your salary, and PAYE is deducted on the total. You don't receive it tax-free.

The reason comes down to how IRD defines taxable payments. A fixed allowance isn't tied to any specific costs you've actually incurred, it's a predetermined amount paid regardless of how much you drive in a given period. IRD treats it as part of your remuneration.

Per-kilometre reimbursement 

A kilometre-based reimbursement works differently. According to IRD, payments that reimburse employees for actual work-related expenses are not taxable. If your employer pays you per kilometre at a rate that reflects your real costs, that reimbursement is tax-free. If the payment exceeds your actual costs, the excess becomes taxable.

IRD does allow tax-free travel allowances in certain specific circumstances — for example, if you're required to work outside your normal hours and travel costs more than usual, or if you need to carry work equipment that makes public transport impractical. These situations are covered under IRD's travel allowances guidance, but these are narrow exceptions, not the standard arrangement most employees encounter.

Car allowance vs per-kilometre reimbursement

These two arrangements are often confused, but they have meaningfully different implications for employees.

From an employee's perspective, a kilometre reimbursement is often more transparent — you're paid for what you actually drive, and the amount is verifiable against IRD's published rates. For employees with high and variable business driving, it can also result in a higher total payment than a fixed allowance that doesn't reflect actual use.

The trade-off is diligent recordkeeping. To receive a per-kilometre reimbursement, you need to log your business trips accurately. A flat allowance requires no records from you, but you'll pay tax on it.

IRD per-kilometre reimbursement rates

Employers use IRD's published kilometre rates as the benchmark for what constitutes a reasonable tax-free reimbursement. For the 2025–2026 income year, the rates are:

The Tier 1 rate covers both fixed and running costs and applies to the first 14,000 kilometres driven in the year across all use, business and personal combined. The lower Tier 2 rate covers running costs only and applies once total annual kilometres exceed 14,000.

For a full breakdown of the current rates and how they've changed year on year, see our article on IRD kilometre rates for 2025–2026.

Example

You drive 600 km for work in a month in a petrol car. Your total annual kilometres are well under 14,000, so the Tier 1 rate applies throughout.

600 km × $1.20 = $720 tax-free reimbursement

If your employer pays above the IRD rate, say $1.50 per km, the excess of 30 cents per km ($180 in this example) would be taxable. Payments at or below the IRD rate are fully tax-free.

What records do you need to keep?

For a kilometre reimbursement, you'll need to provide your employer with a record of your business trips. This typically means logging:

• The date of each trip
• The start and end location, or the purpose of the trip
• The distance driven

Your employer needs this to verify the reimbursement is based on actual business travel. Without a record, they can't confirm the payment qualifies as a tax-free reimbursement rather than a taxable allowance.

A pen-and-paper log works, though it's easy to let slip. Many employees use a vehicle logbook app that logs each journey automatically. This produces an accurate record with little manual effort. Driversnote does this in the background and lets you export a clear trip report when you need to submit your claim.

For a flat car allowance, no recordkeeping is required from your side. The allowance is paid and taxed as part of your salary regardless of how much you drive.

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