Employees frequently use their own cars for business journeys and it is common for employers to pay employees a mileage allowance each time that they do so.
To save work, HMRC set rates which employers can pay to employees free of tax and without the need to report the payments on the employee’s P11D or, as appropriate, P9D.
What can be paid tax free?
The Approved Mileage Allowance Payments system allows employers to pay employees a mileage allowance each year up to an approved amount without having to deduct tax or report the payments to HMRC. The approved amount is simply the number of business miles that the employee drives in his own vehicle multiplied by the rate for that vehicle. For 2015/16 the rates are as follows:
|Type of vehicle||Rate per business mile|
First 10,000 business miles: 45p per mile
Subsequent business miles: 25p per mile
Example: Jake uses his own car for work. In 2015/16 he drives 12,000 business miles. The approved amount is £5,000 ((10,000 miles @ 45p per mile) + (2,000 miles @ 25p per mile)). Thus as long as his employer does not pay mileage allowances in excess of £5,000 in 2015/16, the amounts can be paid tax-free without any need to report them to HMRC.
What happens if the rate paid exceeds the approved amount?
In the event that the employer pays mileage allowances in excess of the approved amount, the excess, known as the taxable mileage profit, must be reported in section E of the employee’s P11D.
What happens if the employer pays less than the approved amount?
In this situation, the allowance is paid tax free as it is less than the approved amount, but the employee can claim tax relief (known as mileage allowance relief) for the difference between the amount paid and the approved amount. The employer can make an optional report to HMTV of unused mileage allowance balances under the Mileage Allowance Optional Reporting Scheme (MARORS).
What about NICs?
A similar scheme applies for NICS but as NICs are not calculated on a cumulative basis, the approved rate for cars is 45p per mile for NIC purposes, regardless of how many business miles the employee drives in a tax year.
What about company car drivers?
The Approved Mileage Allowance Payments scheme does not apply to company car drivers and employers cannot use AMAP rates to make tax-free mileage payments to company car drivers. However, HMRC publish advisory fuel rates which can be used to agree dispensations for mileage allowances paid to company car drivers for 2015/16, thus removing the need to report them to HMRC.
Need to know: The Approved Mileage Allowance Payments rates only apply to employees using their own cars for business, not to company car drivers. The dispensation regime is being replaced from 2016/17 by a statutory exemption for paid and reimbursed expenses that are fully deductible. The AMAP system will continue to be available. The new exemption will apply automatically and will enable company car drivers to be reimbursed at advisory fuel rates without the need for a dispensation.