How to pay Mileage Allowance Payments for business mileage

17 July 2017

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When you’re running a business, it’s likely some of your employees will rack up business mileage in their own car. Driving around to go to meetings, visit new clients and attend business events will soon start to add up. So, is there any way to claim for this mileage and get back some of your expenses?

The short answer is, ‘Yes, they can claim a mileage allowance for business use of their car’.

The longer answer is that there are certain qualifying conditions and thresholds they’ll need to meet to claim this allowance in the most tax-efficient way.

What are Mileage Allowance Payments?

When your employee is using their own vehicle for business purposes, you can pay them Mileage Allowance Payments (MAPs) to cover some of the associated costs.

Each year, you can pay your employee a certain amount of MAPs – and as long as the total doesn’t go over the ‘approved amount’, you don’t need to report this to HM Revenue & Customs (HMRC) either, making the whole process much easier.

Finding the ‘approved amount’ is pretty simple; just multiply the person’s business travel miles for the year by the rate per mile for their vehicle.

These are the current rates for cars/vans, motorcycles and bikes:

Type of vehicle First 10,000 miles Above 10,000 miles
Cars and vans 45p (40p before 2011 to 2012) 25p
Motorcycles 24p 24p
Bikes 20p 20p

If what you pay your employee exceeds the approved amount then you must:

  • report on form P11D, the form that covers all benefits paid to them in the year
  • add anything above the ‘approved amount’ to the employee’s pay, and deduct and pay tax as normal

If the amount falls below the approved amount then don’t have to report this to HMRC, but:

  • your employee will be able to get tax relief (called Mileage Allowance Relief, or MAR) on the unused balance of the approved amount
  • you can make separate optional reports to HMRC of any such unused balances under a scheme called the Mileage Allowance Relief Optional Reporting Scheme (MARORS) – there’s more information on this here.

How to get the best from MAPs

How do you set up your systems to make MAPs work for you, your team and the business? And, importantly, how do you record the initial mileage to make sure you’ve got all the data and receipts needed to work out the payments?

Here at FD Works, we use a third-party app called Tripcatcher that your employee uses to record all their mileage, straight to their smartphone and into your Xero account. All business trips are logged in Tripcatcher which calculates how much is due back to the employee, based on the miles they’ve incurred and the rate at which you pay mileage. Once the employee has completed their mileage for the month, it’s published into Receipt Bank and added to their expense report, giving you a clear breakdown of their mileage.

As you’ll see from the chart above, the current allowance set by HMRC is 45p per mile up to the first 10,000 miles and 25p per mile thereafter. You can pay your employee any amount per mile you want but anything above 45p per mile will be classed as a benefit and will need to be reported on a P11D and then taxed.

Anything below the 45p per mile can be claimed as tax relief on a self-assessment tax return, which your employee would need to prepare themselves. This tax relief is the ‘Mileage Allowance Relief’ mentioned above, and is a good way for your travelling team members to claim back some tax relief. As the employer, you’ll also save anything under the 45p per mile that you pay your employees, meaning there’s a benefit to you as well. The downside is that your employee has to register for self assessment and then prepare their own tax returns – an additional admin hassle that they may not necessarily want to deal with.

Most employers tend to pay 45p per mile, as you’ll already be claiming tax relief on this as a cost to the business and employees are being paid the full amount they can receive, tax free. It also means that you, as an employer, don’t need to prepare P11Ds on behalf of your employees and your employees don’t need to file a tax return.

Putting MAPs into practice

If you’re looking to use MAPs and want to pay your team the tax-free payments they’re entitled to, how does this work in practice?

Here are a few common questions we get asked, with the detailed answers you need to set your mind at rest around mileage payments:

1. “Does the £0.45 x mileage just get added to my employee’s normal payroll for month end?”

The mileage will be added to an expense report which will then be paid directly to your employee, along with all other expenses for that month. It’s not subject to PAYE, so it wouldn’t normally go through your payroll.

2. “If my employee doesn’t sign up for tax relief, will the amount I pay them be taxed at the same rate as their other income?”

Your employee can only claim the tax relief if he/she is being paid less than £0.45 per mile. The tax relief would be claimed on the shortfall of the £0.45 that’s paid to them. In this scenario, we’d recommend that your employee registers for self assessment in advance of 5 April, ready to submit a tax return for the coming tax year. If you pay them more than £0.45 then they’ll be taxed at 12% (as it’s subject to National Insurance) of anything above the £0.45. This is done via a P11D form that shows HMRC all benefits this person has received.

3. “Could my employee provide receipts for their fuel as an alternative to using Tripcatcher and to avoid the admin (i.e. treat the mileage expense like any other expense)?”

Unfortunately, it’s not as simple as submitting receipts for fuel as you’d then also be paying for some of your employee’s personal travel – that would make it a benefit to your employee and would need to be reported on a P11D form. You’d then have the tricky job of working out how much of the fuel relates to business and how much relates to personal, a task which can get extremely messy. We’d always recommend sticking to mileage as the metric you record and measure business travel by. It’s straightforward, and using the Tripcatcher and Receipt Bank apps, it’s a piece of cake to do.

Make mileage claims work for everyone in the business

As with most tax-free benefits, making MAPs work for you is about knowing the details and planning ahead to get the best outcome. If your team are spending a lot of time using their own vehicles, adding the benefit of paying their mileage adds real value for them (and is good business practice for the wider company too).

Need a hand setting up your mileage system?

If you want to pay MAPs to your employees, we’ll set up Xero and all the apps needed to track and run your mileage expenses.

Call us now