Employees using their own vehicle for business travel is common in most organisations. Whilst the position is usually straightforward, it’s important to be aware of the tax and National Insurance rules so payments are treated correctly. Otherwise, questions may be raised by HMRC in the event of an employer compliance visit. In the worst case scenario, employers may be required to pay any tax not correctly deducted from employees (as well as potential interest and penalties) to HMRC.

Different rules apply for employees using company provided vehicles, which we explored in our recent article on business mileage rates for company cars.

What can be reimbursed to employees

HMRC have approved mileage rates which employers can use to pay for mileage incurred on business journeys. Provided the payments are not part of optional remuneration arrangements, there are no tax and National Insurance implications for reimbursing business travel at HMRC approved rates.

These rates are designed to cover the vehicle running costs, such as fuel, repairs and servicing, so no further amounts can be paid in respect of those items. Costs such as parking, road tolls or congestion charges can be reimbursed without tax or National Insurance being payable, but this would not be the case for the employee’s parking or speeding fines.

For business travel in a car or a van, mileage is paid at 45p per mile for the first 10,000 business miles in a tax year and 25p per mile thereafter. These rates apply regardless of whether the employee’s vehicle is diesel, petrol, hybrid or electric.

If the employee also works for an associated employer, the mileage travelled in both employments need to be considered when applying the 10,000 business mile limit.

A lower rate of 24p per business mile applies for motorcycles and 20p per business mile applies for business travel in a bicycle. There’s no 10,000 mile limit in either case.

The HMRC approved rates are fixed, even where the employee’s actual costs are higher. As the rates have been unchanged since the 2011/12 tax year, the ATT has called on the Government to review them and we have submitted representations on this issue. We continue to press for the rates to be revisited as some workers such as care workers may be particularly out of pocket.

Additional payment for passengers

The rules allow an additional mileage payment where the employee takes passengers on a business journey. Employers can pay 5p per business mile for each passenger where the passenger is a fellow employee also travelling on business. This additional passenger payment has no tax or National Insurance implications, in the same way as regular mileage.

Where the employer pays above HMRC approved rates

Where the employer pays above HMRC approved rates, there can be tax and National Insurance costs. The HMRC working sheet can help in more complex cases.

Mileage above HMRC approved rates should be reported on Form P11D for tax purposes unless the employer is payrolling benefits. In contrast, no P11D entries are needed where payments are at or below the approved rates.

For National Insurance purposes, the excess above approved rates should be subject to Class 1 National Insurance via the payroll. It’s important to be aware that the 10,000 business miles threshold doesn’t apply for National Insurance purposes so 45p per business mile should be used when calculating any potential National Insurance costs for all business journeys in an employee’s car or van.

Where the employer pays below HMRC approved rates

In some cases, the employer will either not reimburse business travel or pay below HMRC approved rates. Employees are allowed to claim tax relief (but not National Insurance relief) on the difference between the amount reimbursed and the approved amount. However, the employee can’t claim additional relief for passenger mileage paid below 5p per business mile.

An employee can claim tax relief online, or on their self-assessment tax return (if they submit one). HMRC will expect the employee to be able to provide evidence of the mileage travelled and to demonstrate the business nature of the journey.

This article reflects the position at the date of publication. If you are reading this at a later date you are advised to check that that position has not changed in the time since. 

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