Providing mileage allowance for employees who drive for work has become more popular in recent years. But with HMRC’s many rules, it can be confusing for employers and employees alike how this process works. This article will guide you through the main rules you should be aware of as an employer paying out mileage allowance, as an employee receiving the payments, and as self-employed – claiming deductions.
Mileage allowance for employees
As an employer, you are not obliged to pay a mileage allowance to your employees. However, many choose to reimburse their employees for business mileage, as anything paid under or at the same level of the approved mileage rates from HMRC is not reported to the authority.
If you pay more per mile than the approved rate, the excess sum will be considered as personal benefits for your employee and they’ll have to pay tax on that amount.
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How do I know how much mileage allowance to pay my employees?
If an employee of yours has driven 70 miles this month, and you provide a 40p rate per mile, the calculation is as follows:
70 x 0.40 = £28
What should my employees know about mileage allowance?
If employees are paid less, they are not taxed on the amount they’ve received for driving, and they can claim Mileage Allowance Relief (MAR).
What tax deduction do my employees get if I don’t reimburse them for their business mileage with the full amount?
Your employees can claim Mileage Allowance Relief (MAR). MAR is based on HMRC’s advisory rates. If you reimburse your employees with 40p per mile, they will be able to claim an extra 5p for each mile driven that year as tax relief.
Mileage allowance for self-employed
I am self-employed. What rules do I follow when I’m driving for my business?
As self-employed, you can claim mileage with one of two different methods – simplified vehicle expenses, or actual vehicle costs.
Claiming mileage with the actual vehicle costs method means you’ll have deductions for every penny you’ve spent on business mileage for the year. You should keep all receipts of your business travel spending. Vehicle costs you can claim include:
- Car maintenance and servicing
- Breakdown cover
- License fees
This method might be beneficial for you if your vehicle expenses are high due to e.g. expensive insurance or road tax. Keep in mind it can be a time-consuming way of preparing for your annual tax claims.
The simplified expenses method is great to avoid lengthy calculations and receipt collection. With it, you use a flat rate set by HMRC to calculate your mileage allowance claim. The flat rate covers all vehicle costs for your business driving such as fuel, maintenance, depreciation, insurance, road tax etc.
Other expenses you can claim
How to claim mileage allowance as self-employed
No matter which method you choose for claiming mileage expenses as self-employed, you can claim it through your self-assessment tax return. You won’t need to submit any proof of the claim but keep your receipts and mileage logs for five years in case of an audit.
What are the current mileage rates set by HMRC?
The rates for 2021 are as follows:
- Cars and vans – 45p for the first 10,000 miles, 25p for every mile over 10,000 driven miles for business
- Motorcycles – 24p per mile regardless of the miles driven
- Bicycles – 20p per mile regardless of the miles driven
What should a logbook contain, according to HMRC’s requirements?
A mileage logbook is considered HMRC compliant if it includes the following information:
- The date of the trips
- The start and end address of each trip, including postcodes
- The distance driven
Additional for employees:
The total amount of mileage allowance that your employer has paid out to you.
How do I keep an accurate logbook?
There are a few options for keeping a logbook – on paper, as a spreadsheet, or through an application. Paper logs and spreadsheets require you to manually input the needed information of your mileage. Using a mobile application has become popular in recent years for the ease of not having to do exactly that.
Mobile applications use GPS to track your driving and automatically create a logbook. If choosing an app, look for one that creates HMRC-compliant records that can be used for both mileage allowance payments and mileage allowance relief.
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