It is common practise for a UK employer to pay an employee expenses when that employee uses his own vehicle for business journeys. Often the amount paid is based upon a standard rate per mile which varies from employer to employer. There are tax issues every employee should be aware of to maximise tax free expenses and minimise income tax payments.
The nature of the business journeys must adhere to certain rules in order for these expense payments to be tax free. Not usually an issue when an employee is paid expenses but nevertheless something each employee should be aware of.
In order that the payments are free of tax are three general rules. First the payments must be made to yourself and not to a third party, for example another company receiving the money on your behalf. The use of the vehicle must be a work journey and excludes travel to work where it is considered that work place is a permanent place of work. And finally the amount paid must be within the mileage allowances fixed by the government and part of the Inland Revenue rules on the limits for mileage payments.
Any other payments relating to the use of your own vehicle which do not fall within the above rules are regarded as additional income and subject to income tax and national insurance deductions as would be other forms of payment. Also any payments made in respect of non work journeys fall outside the rules and would be taxed as additional income.
A work journey is one which you must carry out as part of doing that job including when requested by the employer to conduct a specific business journey on its behalf. Visiting suppliers, clients, delivering goods and attending meetings outside the normal workplace would all be considered work journeys.
A journey to a normal place of business would not be considered a work journey and that rule also excludes detours during the journey for example to visit a client or drop off goods. However if the detour on the way to work is significant then the excess mileage covered would be allowable and the expenses paid not subject to tax.
The approved mileage allowance for cars and vans in the UK is 40p per mile for the first 10,000 business miles and 25p per mile for each business mile over 10,000 miles in each tax year. The approved mileage allowance for motor cycles is 24p per mile for the first 10,000 business miles and 24p per mile for each business mile over 10,000 miles in each tax year. The approved mileage allowance for bicycles is 20p per mile for the first 10,000 business miles and 20p per mile for each business mile over 10,000 miles in each tax year.
These rates are the maximum levels of expenses an employee can receive tax free during a tax year, were set in the financial year 2002-03 and still fixed at that level in the financial year 2007-08. Employees are not due any tax free payments on any other vehicle running costs. For example if you break down on a journey and your employer assists with the financial cost of repairing that vehicle any amounts paid over and above the maximum mileage rates quoted above would be taxable.
The bad news is if your employer pays you more than the above mileage allowances then the excess amount paid is taxable as additional income. If for example your employer pays 45p per mile for the first 10,000 miles then it would be normal for that employer to include the different between 45p and 40p in your wage slip and deduct income tax from the 5p.
The good news is if your employer pays you less than the mileage allowances then you are entitled to claim mileage allowance relief on the shortfall. If for example your employer pays 35p per mile then less than 10,000 miles you are entitled to claim the mileage allowance relief on the number of miles at 35p multiplied by the 5p shortfall.
To claim the mileage allowance tax relief employees must maintain a record of the work journeys and the amounts paid. Those records should state the date, mileage covered, a brief note of the journey and the amount paid by the employer, records which may be required to substantiate the mileage allowance relief. To actually make the claim for relief this can be done by sending a letter with the details to the Inland Revenue at the end of the financial year or alternatively request and complete the Inland Revenue form provided for this purpose.
Using different vehicles during the tax year is not relevant. The total mileage of all vehicles used is the relevant figure. However being paid a mileage allowance by more than one employer is relevant.
If during the financial year an employee has been paid a mileage allowance by more than one employer then the total paid from all employers must be added together to produce the total amount paid. For example if one employer paid 30p per mile for 1,000 miles and a second employer paid 35p per mile for a further 2,000 miles then the total payment would be 1,000 pounds (300 + 700) and the mileage allowance would be 1,200 pounds (400 + 800). The mileage allowance tax relief in this example would be 200 pounds at the employees maximum tax rate.
If an employee has not claimed mileage allowance relief in past years then application can be made to the Inland Revenue to reclaim the relief for a period up to six years after the year the claim was not made. When making a claim for unclaimed tax relief in previous years the Inland Revenue are likely to request some evidence of the claim which your previous employer may be able to provide.
Good luck with your claim for mileage allowance relief. If you found this article useful please copy and submit the article to forums and blogs across the internet to make as many people as possible of the money out there waiting to be claimed. If posting this article then the author signature and links must also be included in the posting.
