Understanding HMRC’s Approved Mileage Allowance for Employees Using Their Own Vehicles

For many employees, especially those in roles that require frequent travel, the use of personal vehicles for business purposes is a common practice. However, navigating the tax implications of using a personal vehicle for work can be complex. HMRC’s approved mileage allowance regime provides a clear framework for both employers and employees to manage these expenses effectively.

The Shift Away from Company Cars

In recent years, the tax advantages of company cars have diminished significantly due to increased tax charges. As a result, more employees are opting to use their own vehicles for work-related travel. While this can be more cost-effective, it also raises questions about how to manage the expenses associated with using a personal vehicle for business.

The General Rule for Expense Deductions

Under tax legislation (specifically ITEPA 2003, s 336), employees can generally claim a deduction for expenses that are incurred “wholly, exclusively, and necessarily” in the performance of their job duties. However, when it comes to vehicle expenses, there is a specific provision that overrides this general rule.

HMRC’s Mileage Allowance Regime

Instead of applying the general rule for expense deductions, HMRC has established a specific mileage allowance regime under ITEPA 2003, s 229 et seq. This regime allows employers to reimburse employees for the use of their own vehicles at rates approved by HMRC. These rates are designed to cover various costs associated with vehicle use, including depreciation, insurance, fuel, and maintenance.

HMRC Approved Mileage Rates

The rates set by HMRC for the 2024/25 tax year are as follows:

• Cars and Vans: 45p per mile for the first 10,000 miles, then 25p per mile for any additional miles.
• Motorcycles: 24p per mile.
• Bicycles: 20p per mile.

These rates apply to business miles only and are tax-free, meaning that payments made at these rates are exempt from both income tax and National Insurance contributions (NICs). For example, if an employee like Ms. Smith drives 15,000 miles in a year as part of her job, she could receive £5,750 tax-free (10,000 miles at 45p per mile plus 5,000 miles at 25p per mile).

The Importance of Accurate Record-Keeping

Both employers and employees must keep detailed records of business mileage to justify the payments made under the mileage allowance regime. If HMRC investigates and finds insufficient evidence of the claimed business mileage, it could lead to significant income tax and NICs liabilities. Additionally, while the mileage allowance covers most vehicle-related expenses, costs such as parking, congestion charges, and clean air charges can be reimbursed separately and should also be documented.

Mileage Allowance Relief: What If Your Employer Pays Less?

In some cases, an employer may pay less than the HMRC-approved rates or not reimburse mileage at all. When this happens, employees can claim Mileage Allowance Relief to cover the difference. For instance, if Ms. Smith’s employer only reimburses her at a flat rate of 25p per mile, she would receive £3,750 for her 15,000 miles. However, since the HMRC-approved rate would have allowed her to claim £5,750, she could deduct the £2,000 shortfall from her salary as Mileage Allowance Relief. If Ms. Smith is a basic rate taxpayer, she would receive a tax refund of £400 (20% of £2,000).

Excess Mileage Payments

If an employer reimburses an employee at a rate higher than the HMRC-approved rates, the excess amount is treated as taxable income. This excess is added to the employee’s earnings for the period. As it is subject to income tax and Class 1 NICs under the PAYE system.

Conclusion: Maximizing Your Mileage Allowance

While claiming Mileage Allowance Relief is beneficial, it’s often more advantageous to negotiate a higher mileage rate with your employer. Full reimbursement at HMRC’s approved rates means you recover the full cost of using your vehicle for work. Whereas tax relief only allows you to recoup a portion of that cost.

At Merranti Accounting, we understand the importance of making the most out of your allowable deductions and reimbursements. If you have questions about how to navigate HMRC’s mileage allowance regime or need advice on claiming Mileage Allowance Relief. Our team is here to help. Contact us today to ensure you’re getting the most out of your vehicle expenses and staying compliant with HMRC regulations.

This blog post is part of our ongoing effort to keep you informed about important tax issues that impact your day-to-day business operations. Stay tuned for more insights and updates in our future posts.