Paying employees more than HMRC's approved mileage allowance

It seems like the price of fuel is increasing every day. If you have employees who are paid business fuel at HMRC's set mileage rates, it may well be that this does not cover the cost to the employee. If you are considering paying above that rate, be aware that this has both tax and NIC consequences.

Far fewer employees have petrol or diesel company cars or vans these days because the tax charged on the benefit in kind generally means it is not cost-effective to do so. This is noting that favourable benefit in kind rates are available for low emission electric vehicles, as well as tax reliefs for companies on purchase. Instead, many employees use their own cars when travelling for business and their employer reimburses them, usually to the HMRC approved amount per mile.

Approved Mileage Allowance Payments Scheme

The Approved Mileage Allowance Payments scheme allows employers to make tax-free mileage payments up to an 'approved amount' where the employee undertakes a business journey in their own car or van. These approved rates have not changed for years; being 45p per mile for the first 10,000 business miles then 25p per mile thereafter for the tax exemption. The NIC exemption rate is 45p per mile for all business miles.

The issue if you pay more

The problem arises if you pay more than these tax-free set amounts. If the payment is more than 45p per mile, the excess is a benefit in kind charged on the employee and usually taxed via the employee’s PAYE coding. For NIC purposes the excess is charged to Class 1 NIC in the same way as the payment would be if it were a bonus or salary. All of this increases the tax and NIC bill for the employee so they may be no better off. If HMRC's set rate does not cover the actual cost, the employee can claim deduction for the difference, but this can entail a lot of calculations in working out the actual figures so maybe not worthwhile. One option is to reimburse the actual cost but again this can involve a lot of calculation work. Otherwise, the employer could pay an enhanced rate to cover the cost to the employee of using the car for business plus the tax and NIC payable on the excess over the approved rate, but the employee would have to take the tax hit.

Further help

We appreciate that this can be a tricky area to navigate, so please get in touch if you have any queries by emailing me at paul.newbold@torgersens.com.

About the Author

Paul Newbold

Partner

After qualifying with KPMG where he gained significant audit experience, Paul joined Torgersens in 1991 and became the firm’s audit partner in 2000. Paul employs his broad range of financial skills to provide commercial and accounting advice to a range of owner-managed businesses in the independent retail, education and professional services sectors. He also has extensive experience dealing with charities, Registered Social Landlords and not-for-profit organisations and co-operatives.   Outside of work, Paul likes to visit Eastern France and South-West German and read novels by David Morrell, Michael Blake and Harper Lee. He also likes watching films, his favourite is The Shawshank Redemption.

To get in touch please e-mail paul.newbold@torgersens.com.