HR

What Is Mileage Allowance And Who Can Claim It?

Bryan Brown | 18 February 2022 | 2 years ago

Mileage Allowance

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.
vehicles eligible for mileage allowance

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:

Example One

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.

Example Two

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.

Example Three

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.

report mileage to HMRC

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:

Pros

  • 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.

Cons

  • 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?

Self-employed people who use their vehicles for work are also entitled to mileage allowance. They will have to report the business miles they drive using form P11D, and the amount will then be deducted from their taxable profits.

The amount that can be claimed for mileage allowance is the same as it would be for an employee, and the rates are also the same. The only difference is that self-employed people cannot use MARORS to avoid having to report their payments on form P11D.

What are the Pros and Cons of a Company Car?

The main alternative to an employee using their personal car for work purposes is for the employer to provide a company car. There are many reasons for this, and it is up to each employee to decide which option suits them best:

Pros of using a Company Car

  • Tax benefits – The cost of running a car will be covered by the employer, so employees do not need to worry about fuel consumption or vehicle excise duty.
  • No need to worry about maintenance – The employer will take care of all the costs associated with maintaining the car, including tyres, servicing and repairs.
  • Mileage allowance payments – Employees will still be entitled to receive mileage allowance payments from the employer, even if they are using a company car.

Cons of using a Company Car

  • Higher running costs – The maintenance and running expenses of a company car are generally higher than those of an employee’s personal vehicle.
  • No tax breaks – Employees will not be able to claim any income tax relief or vouchers from the government, as they can if they use their own cars for work purposes.
how to save money on fuel

How to Save Money on Fuel

One of the main expenses associated with using a vehicle for work is fuel. It can be very expensive to use your own car, but there are ways that employees can save money on their motoring costs:

  • Buy an efficient car – If employees buy a new or nearly-new company car, it will probably have better fuel consumption than older models.
  • Consider a hybrid – Hybrid vehicles have improved fuel consumption and emission rates, so can be cheaper to run than non-hybrid cars. The most efficient ones are those that are plug-in hybrids or electric vehicles.
  • Purchase green electricity – Employees who drive an electric or hybrid vehicle can save money on their running costs and reduce carbon emissions by using greener forms of electricity to charge the car’s battery.
  • Work from home if possible – If employees are able to work at least one day per week or more from home, they can save a lot of money on transport costs.
  • Use public transport – When employees have to travel to meetings or other work-related activities, using public transport can be cheaper than driving.
  • Share rides – If employees live near to each other, they can save money on fuel by sharing a car. An extra 5p of mileage allowance can be claimed by the vehicle owner in this case.

Tax Exemptions for Vehicles and Fuel Used for Work Purposes

Vehicles and fuel used for work purposes are exempt from certain taxes:

  • Vehicles  – Vehicles used for work purposes are usually considered exempt from vehicle excise duty.
  • Fuel – Fuel is also exempt in some circumstances, although the relief that applies depends on whether fuel has been purchased by an employee or employer. If employees have paid tax and NICs when they bought the fuel, they can claim tax relief from HMRC. If employers have paid NICs and Business Rates on fuel used for work purposes, employees may be entitled to a business rates refund.
  • Employee Tax Relief  – Employees who buy their own vehicles or car parts will be able to get some form of income tax relief when accounting for their business use of the car. The amount of relief they get will depend on how much they use the car for personal and business purposes, and whether they are self-employed or employed.
  • Mileage Allowance Relief – Employees who receive mileage allowance payments from their employer can also claim a form of tax relief known as Mileage Allowance Relief. This is a relief that can be claimed on the income tax paid on those payments. The amount of relief that employees can receive depends on how much they use their car for personal and business purposes.

The Future of Company Cars

In past years, having a company car was seen as a perk, but with the world facing an existential threat in the form of Climate Change, the future of the company car is looking very uncertain. This is because cars will be likely to incur higher carbon emissions tax in the future or may even be banned altogether.

In addition, company cars are usually more expensive than an employee’s personal car so they cost businesses a lot of money if employees use them for private purposes such as visiting friends and family or going shopping. This is because employers have to pay business rates on vehicles that aren’t used

However, it depends largely on the specific make of car chosen whether they’ll be viable in ten years’ time or not. It may prove to be that electric company cars become the norm but until there is enough infrastructure to support this, we may still be using diesel and petrol cars for a long time yet.

What is clear is that employees should be mindful of the benefits and drawbacks of having a company car before agreeing to use one. For many people, the convenience and status of having a company car outweigh the extra costs, but for others, there can be significant drawbacks.

the future of company cars

Conclusion

Whilst there are a few considerations employees need to be aware of when using their own vehicle for work, mileage allowance payments can make it a mutually beneficial arrangement between employees and employers. Employees should keep in mind what type of car they have, how efficient it is and how much they will need to use it for business purposes if they want to maximise their mileage allowance payments and reduce their tax bill.

Topic

HR

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