Many employees who use their own car, van, motor cycle or cycle for work journeys are paid an allowance by their employer to cover some or all of the costs. It can be in the form of a lump sum or periodic payments, but is usually based on a rate per mile.
Provided certain rules are met these payments can be made free of tax and National Insurance contributions.
What payments are included in the scheme?
The only payments which are free of tax are those made to you personally (not those made to someone else on your behalf) for expenses related to your use of your own vehicle for work journeys within a limit fixed by law which is based on your business mileage.
All other payments related to your own vehicle (including those made to someone else on your behalf) are taxed as earnings in the normal way.
The rules for National Insurance are slightly different, but your employer is responsible for working out any amounts which you are entitled to receive without paying NI contributions.
If you are paid an allowance for non-work journeys, the payments are subject to tax and NICs in the usual way and nothing in this factsheet applies to those payments.
Which journeys are ‘work journeys’?
Work journeys are those which you have to make in the course of doing your job. They include, for example, delivering goods or making calls to customers.
Any private journeys unrelated to work are not included. Nor are journeys to and from your usual place of work (commuting journeys), even if you call at a client’s on the way (unless the journey is significantly different from your usual commuting journey).
How are the tax-free amounts calculated?
The maximum you can receive tax-free for a tax year is your mileage on work journeys multiplied by a set rate per mile. There are three kinds of vehicle, and the rate depends on the kind you use - car or van, motor cycle and cycle. You can find the rates at www.hmrc.gov.uk/rates/travel.htm.
What if my actual expenses are more than the tax-free amount?
The tax-free amount is the maximum relief you are entitled to in any tax year, so you are not entitled to any additional relief in that case, whether for interest payments, business insurance, depreciation or any other payments you may have to make on your car.
All such expenses have been taken into account in determining the rates above.
What if I am paid more or less than the tax-free amount?
If you are paid more than the tax-free amount, the excess is taxable as income. Your employer is responsible for advising HMRC of the amount and tax is normally collected via your PAYE tax code. If you receive a tax return, you are responsible for including the same amount on the return.
If you are paid less than the tax-free amount, you are entitled to Mileage Allowance Relief for the amount by which the payments you received fall short. For example, if the maximum is 40p per mile for work journeys in your car and your employer only pays you 36p per mile, you are entitled to additional tax relief of 4p per mile. You can advise HMRC of this by letter, or you can use a form available for the purpose (PDF 97K)
What about payments made for passengers?
You can receive amounts free of both tax and NICs for carrying fellow employees in a car or van on journeys which are also work journeys for them. Only payments specifically for carrying passengers count and there is no relief if you receive less, or nothing at all. You can find the rate at www.hmrc.gov.uk/rates/travel.htm.
What records do I need to keep?
You will need to keep records of your work journeys (date, mileage, details of journey). Your employer will need to know the mileage in order to make any expenses payments to you. You will need them to substantiate your right to any mileage allowance relief, whether or not you do this via a tax return.
What if I use more than one vehicle in the year?
It does not matter how many vehicles of the same kind you use in the year: you are treated as though you had used the same vehicle throughout.
Calculations for vehicles of different kinds (a car and a motor cycle, for example) are kept separate. All excess payments must be reported, even if you are entitled to mileage allowance relief for another kind of vehicle.
What if I travel on business for more than one employment?
If you have two or more employments that are associated then your business travel for both is added together to work out when you are no longer entitled to the higher mileage rate for business mileage in a car or van for that tax year.
Employments are associated if they are
- with the same employer, or
- with different employers who are under the same control, for example, two different companies in the same group of companies.
If the employments are not associated you are entitled to the higher mileage rate for business mileage travelled in each employment as though you did not hold the other employment.
Please note: this fact sheet is for guidance only and reflects the position at the time of writing. Further information can be found at http://www.hmrc.gov.uk/mileage/index.htm.
Version date: December 2005