Mileage Allowance is a tax-free payment made to employees who use their own car for work. The rate of the allowance depends on what type of vehicle you are using, how much it costs, and your salary. Mileage allowance can be paid in one lump sum or spread out over 12 months. Some employees prefer receiving mileage to having a company car as it reduces their overall tax bill.
But how does mileage allowance work and who is entitled to it?
In this article, we will answer these questions and more to help you understand this complicated tax-free payment.
What is Mileage Allowance?
Mileage allowance is a payment made by employers to their employees who have to use their own car for work. The amount the employee receives depends on a number of factors, including the type of vehicle they are using, the distance they have driven and their salary.
Mileage allowance is a popular benefit for employers and employees in the UK. However, it is important for employees to understand how mileage allowance works before making a decision on whether or not they should claim it.
Who is Entitled to Mileage Allowance?
Any employee who uses their own car for work is entitled to mileage allowance. This includes employees who use their car to travel between different job sites, as well as those who use their vehicle for business purposes only. Mileage allowance should be agreed upon in an employee’s contract of employment.
How can Employees Claim Mileage Allowance Payments?
There are a few different ways employees can claim their mileage allowance payments. The most common way is to submit a Mileage Allowance Claim Form to their employer. This form asks for information such as the number of miles driven, the date of each journey and the business purpose of the trip.
Which Vehicles Qualify for Mileage Allowance?
Employees can receive mileage allowance payments on any vehicle that is owned by them and registered with the DVLA including cars, vans, motorcycles, scooters and bicycles. These vehicles must be used for work purposes for employees to be eligible for mileage allowance.
How is Mileage Allowance Paid by an Employer?
Mileage allowance can be paid in one lump sum or spread out over 12 months. The employer has the option to choose which payment method they prefer, although it is advisable to discuss this with the employee first because they may want to receive their allowance in one sum.
Both options have their pros and cons but the main benefit of receiving the allowance in one lump sum is that the employee may avoid certain tax implications.
What is an Approved Amount?
An approved amount is the number of miles that an employee can drive on business before they have to report their mileage allowance payments to HMRC. To calculate the approved amount, employers should use the HMRC’s approved mileage rates which can be found here on the UK government’s website.
What Needs to be Reported to HMRC?
Mileage allowance payments need to be reported to HMRC if they exceed the employee’s approved amount. This means that any payments made above the approved amount need to be declared to HMRC using form P11D available on the government’s website.
Mileage Allowance Rates Per Mile for Cars and Vans
First ten thousand miles in a tax year – 45 pence per mile
Any additional miles over ten thousand – 25 pence per mile
Mileage Allowance Rates for Motorcycles
First ten thousand miles in a tax year – 24 pence per mile
Any additional miles over ten thousand – 24 pence per mile
Mileage Allowance Rates for Bicycles
First ten thousand miles in a tax year – 20 pence per mile
Any additional miles over ten thousand – 20 pence per mile
Mileage Allowance Rates for Passengers
5 pence per mile when carrying an employee, customer or business partner
Three Examples of Mileage Allowance Calculations
Working out mileage allowance payments can be a little tricky, so here are three examples to help you get started:
If an employee has only driven 5,000 miles in their car during the tax year, their mileage allowance payments would be calculated as 45p x 5,000 = £2,250.
If an employee has driven 12,000 miles in their car during the tax year, their mileage allowance payments would be calculated as 45p x 10,000 + 25 x 2,000 = £5,000.
If an employee has driven 12,000 miles in their car with a passenger during the tax year, their mileage allowance payment would be calculated as 50p x 10,000 + 30p x 2,000 = £5,600.
Employees and employers can check the amount the mileage allowance payments due by using the HMRC’s Calculator.
What is the Mileage Allowance Relief Optional Reporting Scheme (MARORS)?
MARORS is an HMRC scheme that allows employees to report their mileage allowance payments without having to include them on their tax returns. This scheme is optional, which means employees can choose whether or not they want to use it.
The potential pros of cons of participating in MARORS are:
Employees can avoid including their mileage allowance payments on their tax returns.
Employees don’t have to remember to report the amount they receive each year by using the scheme.
The total amount of miles driven will not affect employees’ personal allowances for income tax, as it is a business expense that HMRC has already accounted for.
If an employee uses the MARORS scheme, they will not be taxed on the mileage allowance payments they receive.
Employees can avoid having to pay PAYE tax and National Insurance contributions.
The employer saves money as it is a business expense that has already been accounted for by HMRC.
If an employee does not use this scheme, they may be able to claim back some of the money they have paid in tax and National Insurance contributions.
The employer has to keep track of all the mileage allowance payments made to their employees, as well as any other expenses related to using a car for work.
How does Mileage Allowance Work for Self-Employed People?