Paying employees more than HMRC’s approved mileage allowances
It seems as though the price of fuel is increasing every day. If you have employees for which you pay their business fuel you may be finding that paying at the HMRC’s set mileage rates does not cover the cost to the employee. Paying above that rate has tax and NIC consequences.
These days few employees have petrol or diesel driven company cars or vans because the tax charged on the benefit in kind generally means that it is not cost-effective to do so (more favourable benefit in kind rates are available for low emission electric vehicles, as well as tax reliefs for companies on purchase). Instead many employees travelling on business use their own cars and their employer reimburses them usually to the HMRC approved amount per mile.
The Approved Mileage Allowance Payments scheme allows employers to make tax-free mileage payments up to an ‘approved amount’ where the employee undertakes a business journey in their own car or van. These ‘approved’ rates have not changed for years being 45p per mile for the first 10,000 business miles then 25p per mile thereafter for the tax exemption; the NIC exemption rate is 45p per mile for all business miles.
The problem comes if you pay more than these tax-free set amounts, as it is increasingly becoming aware that businesses may have to in the current financial climate. If payment is more, the excess is a benefit in kind charged on the employee usually taxed via the employees PAYE coding. For NIC purposes the excess is charged to Class 1 NIC in the same way as the payment would be if it were a bonus or salary – all of which increases the tax and NIC bill for the employee so they may be no better off. If HMRC’s set rate does not cover the actual cost, the employee can claim deduction for the difference (but this can entail a lot of calculations in working out the actual figures so maybe not worthwhile). One option to not using the approved rates is to reimburse the actual cost but again this can involve a lot of calculation work. Otherwise the employer could pay an enhanced rate to cover the cost to the employee of using the car for business plus the tax and NIC payable on the excess over the approved rate but the employee would have to take the tax hit.