If you have employees who use either their own car or a company car for business mileage, you can pay mileage allowances tax-free up to certain limit. However, if you pay more than the permitted amount, the excess is taxable and liable to Class 1 National Insurance.
The amount that you can pay tax-free depends on whether the employee uses their own car for business or has a company car.
Employees using their own car for business journeys
Where an employee undertakes business mileage in their own car, you can make tax-fee mileage payments up to the ‘approved amount’. This is simply the employee’s business mileage in their own car in the tax year multiplied by the approved rate. For cars and vans, the approved rate is 45p per mile for the first 10,000 business miles in the tax year and 25p per mile thereafter. So, if an employee drives 12,000 business miles in the tax year, you can make mileage payments of up to £5,000 tax-free (10,000 miles @ 45p per mile plus 2,000 miles @ 25p per mile).
Any excess over the approved amount is taxable. However, if you pay less than the approved amount (or do not pay mileage allowances), the employee can claim tax relief for the difference between the approved amount and the mileage payments received, if any.
The approved amounts are the maximum that can be paid tax-free. You cannot make higher payments tax-free even if the actual costs incurred by the employee exceed the approved amount.
You can also make mileage payments free of National Insurance. However, for National Insurance purposes, the 45p rate is used for all business mileage. Any amount paid in excess of this should be included in gross pay for National Insurance purposes.
Employees using a company car for business journeys
The approved rates do not apply where the employee has a company car. These rates include an element for insurance and depreciation as well as for fuel. Instead, HMRC publishes fuel-only rates (the advisory fuel rates) which can be used to make tax-free mileage payments to employees who use a company car for business mileage and who pay for their own fuel. The rates are published quarterly.
The rates applying from 1 June 2023 are as follows:
|1,400cc or less
|13p per mile
|10p per mile
|1,401 to 2,000cc
|15p per mile
|12p per mile
|23p per mile
|18p per mile
|1,600cc or less
|12p per mile
|1,601cc to 2,000cc
|14p per mile
|18p per mile
If the employee has an electric company car, you can pay a rate of 9p per mile tax-free.
Payments up to the advisory rates can also be made free of National Insurance.
Partner note: ITEPA 2003, ss. 229–235; Social Security (Contributions) Regulations 2001 (SI 2001/1004), reg. 22A; www.gov.uk/guidance/advisory-fuel-rates.
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