Whenever employees are required to make business journeys, either with a company car or with their own, they incur in expenses for fuel. Usually these are paid for by their employer, and it is possible, in this case, to do so without triggering a tax liability.
Employees with a company car
If the employee is travelling with a company car and the employer meets the fuel costs, this can be done tax-free as long as the costs don’t exceed HMRC’s advisory rates, which are updated quarterly and can be found here.
The following is a summary of HMRC’s advisory rates as of 1 December 2018.
|1400cc or less||12p per mile||8p per mile|
|1401 to 2000cc||15p per mile||10p per mile|
|Over 2000cc||22p per mile||15p per mile|
|1600cc or less||10p per mile|
|1601cc to 2000cc||12p per mile|
|Over 2000cc||14p per mile|
Although electricity is not regarded as a fuel for car fuel benefit purposes, an advisory electricity rate of 4 pence per mile was introduced from 1 September 2018.
If the employer pays more than the advisory rate the profits element is taxable and liable to Class 1 (employer and employee National Insurance Contributions).
In December 2018 Adam drives 260 business miles in his company car and claims a mileage allowance from his employer. Adam’s company car is a petrol car with a 1600cc engine. As long as his employer does not pay more than £39 (260 miles @15p), the payments are tax and NIC-free.
Employee’s own car
Where the employee uses their own car for business trips, higher rates apply in order to reflect the costs of insurance, servicing, depreciation, etc. which are borne by the employer when an employee has a company car.
Mileage payments are tax-free if the amount paid does not exceed the approved amount. This is simply the number of business miles for the year multiplied by appropriate approved mileage rate. The rates are shown in the table below.
|Cars and vans||45p per mile for first 10,000 business miles in tax year 25p per miles for subsequent business mile|
|Motorbikes||24p per mile|
|Bicycles||20p per mile|
Mel drives 12,700 business miles in her own car in the tax year in question.
The approved amount is £5,175 ((10,000 miles @ 45p) + (2,700 miles @ 25p)).
As long the payments made to Mel do not exceed £5,175, they are tax free.
For National Insurance purposes, the 45p rate for cars and vans is used for all business miles in the tax year, not just the first 10,000. In the above example, a mileage payment of up to £5,715 would be NIC-free (although anything over £5,175 would be taxable).
If the amount paid exceeds the approved amount, the excess is taxable and must be reported to HMRC on the employee’s P11D or payrolled. If the employer pays less than the approved amount (or does not pay mileage), the employee can claim tax relief for approved amount less anything paid by the employer.
The employer can also pay a tax-free passenger payment of 5p per mile for each passenger also making a business journey. This may encourage car-sharing.
It has to be noted that all of this only applies to business journeys, and does not include commute from the employee’s house to the workplace.