Many employees use their own cars to undertake journeys for their employers. In most cases, employers will pay for this. Generally, they will pay a rate per mile.
HMRC consider this type of mileage payment as tax exempt as long as the rate per mile paid does not exceed a certain amount. Currently, the tax-free rates for cars are:
45p per mile for the first 10,000 business miles in a tax year, and
25p per mile for any additional miles in excess of 10,000.
The same rates per mile apply if you use your own van for business travel.
It is also possible to claim up to 24p per mile for the use of a motorbike and 20p per mile for the use of a bicycle. In both these cases there is no break point at 10,000 miles – you can claim these rates however many business miles you undertake.
Complications arise if you are paid more or less than these agreed rates per mile.
Are you paid more than the approved rates?
If you are paid more, any excess will be treated as a benefit and you will have to pay tax on the difference. Generally, this will be adjusted on the tax code that your employer uses to work out your weekly/monthly tax deduction from salary/wages.
Are you paid less than the approved rates?
If you are paid less than the approved rates per mile, you can claim the difference as a deduction from your taxable income. It’s called Mileage Allowance Relief (MAR).
Consider Jane, who undertook 2,000 business miles for her employer, but was only paid 35p per mile. She can claim 2,000 times 10p (45p – 35p) or £200 against her taxable income.
You will need to advise HMRC of any claim in order to get your tax reduced. If you pay no tax (if your income is below the current personal allowance - £11,000 for 2016-17) there is no tax to recover so a claim is inappropriate.
Your employer can also pay you up to 5p per mile if you carry a passenger as part of your business trip. Again, any payment in excess of this rate will be taxable, but payments of less than 5p per mile cannot be claimed as tax relief.