21 January 2023
A common question asked by many employers over the last year, in view of the spiralling cost of petrol, diesel and indeed electricity, has been, ‘how can we increase the business mileage rate for our employees who are required to use a privately owned car for business purposes?’
The cost of business mileage is a particular issue for employees in the public sector generally and for those working in the social housing and social care sectors, where business travel in a private car is widespread. To put this into perspective, in January 2021 the average price of a litre of unleaded petrol was 118.5p and a litre of diesel was 121.8p. Whilst prices have dipped since the peaks of around £2 per litre in summer 2022, they are still significantly higher than those of two years ago and there is continuing uncertainty as to the direction of prices in 2023.
HMRC approved business mileage rates
Most employers use the HMRC approved mileage allowance payment (AMAP) rates when reimbursing employees for the cost of business travel in a privately owned car. The rates are currently set at 45p per mile for the first 10,000 business miles in a tax year and 25p per mile for subsequent business miles in the same tax year. HMRC has confirmed that where employers make payments for business mileage equal to or below these rates there is no income tax or National Insurance contributions (NICs) due and there is no need to report the payments. The AMAP rates apply to all private cars and vans used for business travel, including those that are fully electric.
The AMAP rates are designed to reflect all running costs, not just the cost of fuel, and the use of uniform rates, regardless of the size of the vehicle or fuel type, clearly favours employees using smaller and/or more fuel-efficient vehicles.
Over the last year there have been increasing calls for HMRC to increase the tax free AMAP rates, which have not been amended since April 2011, to reflect not just the fuel price increases but also increases in the other running costs that they are designed to cover, such as insurance and servicing.
Several formal petitions have been submitted to the government, the most recent calling for the higher AMAP rate to be increased from 45p to 60p per business mile, but in October 2022 the government response merely concluded that, ‘as with all taxes and allowances, the government keeps the AMAP rate under review.’ There was no announcement on any intended increase in the AMAP rates in the November 2022 Autumn Statement, but employers will be hoping that the issue is recognised when the Chancellor of the Exchequer makes his next Budget speech on 15 March 2023.
Separate recommended advisory fuel only rates are published by HMRC each quarter, in relation to amounts that can be reimbursed to employees undertaking business mileage in a company car. Unlike the AMAP rates, the advisory fuel rates vary according to engine size and the fuel type of the vehicle and are adjusted to reflect movements in fuel prices.
What can employers do to help employees cover fuel costs?
In recognition of the fact that the AMAP rates are not in many cases covering employees’ costs for business travel, many employers, including those in the public sector, have agreed to pay mileage rates in excess of current AMAP rates. HMRC stipulates that where mileage payments exceed the amount of the AMAP, the excess is taxable as earnings from the employment and should strictly be subject to income tax and NICs via the payroll. Where this is not possible for practical reasons, the excess can be reported for tax purposes on the appropriate section of the employee’s form P11D.
It should also be remembered that if an employee carries another employee in their own car on a qualifying business journey, employers can additionally pay a passenger payment of up to 5p per mile tax and NIC free over and above the AMAP rates.
Some employers do not currently reimburse employees for business mileage in a privately owned vehicle up to the permitted AMAP limits, particularly if the employee has opted for a car allowance as an alternative to a company car. In cases where an employee is using a private car for business travel and the employer is not reimbursing mileage up to the permitted AMAP limits, mileage allowance relief (MAR) can be claimed by the employee on the difference between the rate paid and the AMAP rate, either through their self-assessment tax return or directly through the government gateway.
Employers may want to remind employees that they can claim tax relief on this differential each year. MAR does not apply for NICs purposes.
Finally, whilst not practical in many cases, it should not be forgotten that employers can pay a tax and NICs free business mileage allowance of 24p per mile for the use of a privately owned motorcycle and 20p per mile for the use of a cycle for qualifying business journeys.
For more information, please get in touch with David Williams-Richardson or your usual RSM contact.