Fuel prices are at an all-time high, so if you decide to pay higher mileage rates so that your employee’s aren’t out of pocket, what are the tax and NI implications of this move and is there any way to limit them? Should you pay more than the approved mileage allowance?
Should you pay more than the approved mileage allowance?
There are two options for employees when it comes to using private vehicles for business use: employees can claim a tax deduction, at an HMRC-approved amount, according to the number of miles travelled; or, employers can pay their employees an equivalent tax-exempt mileage allowance .
There’s an advantage to the employer-paid allowance. It’s free of NI contributions whereas the tax deduction does not reduce the NI liability for employee or employer.
HMRC’s approved mileage allowance rates haven’t changed in over a decade. They are:
Car or van Tax free amount -45p per mile for the first 10,000 business miles then 25p per mile
Car or van NI free amount – 45p per mile
If an employer pays more than the tax-free amount, the excess must be reported on Form P11D as a benefit in kind. For NI purposes the excess must also be added to the employee’s salary and charged to Class 1 NI, as it would be for a salary.
The following allowances are tax and NI exempt:
• benchmark subsistence payments
• incidental overnight expenses
• working rule agreement allowances
If company policy is not to pay employees’ subsistence when they travel on business (apart from overnight stops) or reimburse at a rate less than HMRC’s tax and NI exempt allowances, you could pay these to top up the tax and NI-free mileage allowance to partly compensate the employee for any shortfall.