It’s Approved! – Claiming Tax-free Mileage Expenses

picture of mileometer for article on mileage allowance

As an employee, you are often required to use your own car for business trips. Your employer may allow you to claim a mileage allowance. But what is the tax position? Do you have to tell HMRC and is there tax and National Insurance to pay? And what happens if your employer does not pay your mileage? Can you claim any relief for the costs incurred?

The answer is, it depends.

HMRC’s rate

HMRC set rates which can be paid tax free under the Approved Mileage Allowance Payments scheme (AMAPS). The scheme only applies where employees use their own vehicles for business trips – different rules apply to company car drivers and the self-employed. The AMAPS does not just apply to cars, but also if you use your own van, motorcycle or bicycle.

Tax-free rates

Type of vehicle First 10,000 miles Miles in excess of 10,000 miles
Cars and vans 45p per mile 25p per mile
Motorcycles 24p per mile 24p per mile
Bicycles 20p per mile 20p per mile

For cars and vans, the rate drops from 45p per mile to 25p per mile once the number of business miles tops 10,000 miles in the tax year.

The rates are used to work out the ‘approved amount’. This is the maximum amount that can be paid tax-free. It is found by simply multiplying the number of business miles in the year by the tax-free mileage rate.

Example: calculating the approved amount

Holly is an employee. She uses her car for business and in the 2017/18 tax year undertakes 16,427 business miles. The approved amount is £6,106.75, calculated as follows:

(10,000 miles @ 45p per mile) + (6,427 miles @ 25p per mile)

What journeys count as business journeys?

Business journeys are essentially those which you need to do as part of your job. This may be a visit to a customer or to a client. However, journeys between home and work (‘ordinary commuting’ in tax speak) do not count (except in certain situations when working at a temporary location for less than two years).

Scenario 1: Employer pays mileage at HMRC tax-free rates

Many employers pay mileage at the HMRC approved rates. This makes life easy – there is no tax to pay and the employer does not need to report the payments to HMRC.

Scenario 2: Employer pays mileage at rates that are higher than HMRC’s tax free rates

You may be lucky enough to work for a generous employer who pays mileage rates that are higher than the rates set by HMRC. However, this does mean that there is some tax to pay.

If the mileage payments paid to the employee in the year exceed the ‘approved amount’ (see above), you will, in HMRC’s eyes, be regarded as making a mileage profit. The ‘profit’ element over and above the approved amount is taxable. The employer must report this profit to HMRC on the employee’s P11D in Section E. The tax due will normally be collected from your pay under PAYE via an adjustment to your tax code, so you will not normally need to physically pay it over to HMRC.

Example: calculating the taxable amount

Jake is an employee. He uses his own car for work and drives 3,750 miles in a tax year. His employer pays a mileage allowance of 50p per mile. Jake therefore receives mileage payments of £1,875 (3,750 miles @ 50p) in the tax year.

The approved amount is £1,687.50 (3,750 miles @ 45p per mile).

As Jake is paid more than the approved amount, the `profit’ of £187.50 (£1,875 – £1,687.50) is taxable and must be reported on his P11D.

HMRC produce a working sheet which can be used to work out the amount, if any, that needs to be reported on the P11D – see P11D working sheet 6: mileage allowance payments and passenger payments.

Scenario 3: Mileage payments are less than the approved amount

You may work for an employer who does makes mileage allowance payments, but the rates paid are less than HMRC’s tax-free rates. While there is no tax to pay on the mileage allowance, the AMAPS also allows you to claim tax relief on the shortfall where the mileage payments received are less than the approved amount. The relief claimed is treated like an expense which reduces the amount on which you pay tax.

Example: calculating mileage allowance relief

Lucy uses her own car for work. In a tax year she drives 2,000 business miles. Her employer pays her an allowance of 30p per mile.

The approved amount is £900 (2,000 miles @ 45p per mile).

As Jake is paid more than the approved amount, the `profit’ of £187.50 (£1,875 – £1,687.50) is taxable and must be reported on his P11D.

Lucy receives mileage payments of £600 (2,000 miles @ 30p per mile)

Lucy can claim tax relief for the shortfall of £300 (£900 – £600).

So what do you need to do if this applies to you? Unless your employer reports the shortfall to HMRC under the optional mileage allowance relief optional reporting scheme (MARORS ) – you might need to ask your employer about this – the onus is on you to claim the relief. This can be done either on form P87, or on your self-assessment tax return if you need to complete one. If your mileage is high and your claim is for more than £2,000, it will generally need to be done via the tax return. The P87 form: tax relief for expenses of employment is available on the website.

Scenario 4: No mileage allowance paid

If your employer does not pay mileage, all is not lost. You can claim tax relief for the full ‘approved amount’. The claim should be made either on form P87 or via your tax return.

Claiming relief may trigger a tax repayment.

Additional relief for passengers

Your employer may encourage car sharing. HMRC allow employers to pay a tax-free passenger rate to the driver when they give a lift to one or more fellow employees who are also undertaking a business journey (so, say, if several of you travel to a meeting together). The amount that can be paid tax-free is 5p per passenger per business mile. Unfortunately, though, you cannot claim tax relief if you take passengers and your employer does not make a passenger payment.

What about NIC?

Just to confuse matters, the rules for tax and National Insurance are slightly different. For National Insurance all business mileage for cars and vans can be paid NIC-free at the 45p per mile rate – not just the first 10,000 miles in the tax year. However, if the total amount paid exceeds that payable at HMRC NIC rates, employee and employer Class 1 National Insurance contributions are payable on the excess. This is collected through the payroll.

Click the links for more help on claiming business mileage and HMRC’s Employment Income Manual at EIM31200.