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Tax warning over ‘well-meaning’ increased car mileage allowance rates

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03/08/2022
If your employer goes above and beyond the HMRC approved mileage allowance rates to help cover the soaring cost of fuel, it could backfire in the form of more tax and less benefits.

Under the HMRC Approved Mileage Allowance Payment (AMAP), employers can pay employees a certain amount for using their own, private vehicles for business journeys.

The ‘approved amount’ for business travel stands at 45p for the first 10,000 miles and 25p above 10,000 miles. It applies across fuel types and has been set at this level since 2011.

Up to this ‘approved amount’, the recipient is not liable for a tax charge.

But employers have discretion to reimburse employees more than this advisory rate. Given how petrol and diesel prices have soared to record highs in recent weeks, employers may look to increase the rates for employees using their personal vehicles for business use.

HM Treasury said: “The AMAP rate is intended to create administrative simplicity by using an average. This means that the rate will be more appropriate for some drivers than for others.

“The AMAP rate is advisory, and organisations are not required to reimburse at this level. It is ultimately up to the individual organisation to determine the rate of mileage reimbursement they offer employees or volunteers.”

It added: “Organisations can agree to reimburse drivers the actual cost incurred, where individuals can provide evidence of the expenditure, without an income tax charge arising.”

But according to the Low Incomes Tax Reform Group (LITRG), providing evidence of expenditure above the approved rate can be problematic as drivers would need to keep tabs on miles driven for work purposes, factor in wear and tear, and car depreciation which “constitutes the most significant proportion of the rate”, according to HM Treasury.

Meanwhile, “well-meaning” employers who are starting to pay or reimburse employee business mileage over the HMRC approved amount could lead to more tax, and impact Universal Credit awards.

Victoria Todd, head of LITRG, said: “Where an employer pays or reimburses at more than the approved mileage allowance rate, HMRC deem the employee to have received extra wages. The way the excess is treated for tax and National Insurance purposes is complicated.”

Todd added: “Where the employer applies the correct treatment, only the excess amount should flow through to DWP [Department for Work and Pensions] to be picked up as income for Universal Credit purposes.

“This means where an employer reimburses mileage at a rate at, say, 50p per mile then Universal Credit should ignore 45p a mile but should include the 5p balance, after any tax and National Insurance, as income.

“However this still means that, in addition to potentially confusing tax and National Insurance treatment, an employee’s Universal Credit award will be lower than they may expect because of their higher income.”

‘Headache for well-meaning employers’

Todd said these complications are a “potential headache for the well-meaning employer” and a “shock to the employee when they realise they may not feel much of the benefit of their employer’s generosity”.

“And this is before you start to consider the possibility of errors in how the excess is processed by employers due to the complexity of the rules.

“This situation would be easily relieved if HMRC increased the approved rates, as they have the ‘advisory fuel rates’ for company car users recently. This might encourage more employers to pay their employees more for mileage. It would also mean an increased tax relief deduction for employees where employers do not pay at the rates – an added bonus for the low-paid who are dependent upon their cars. In the light of soaring fuel prices, now is the time for a review,” she said.

Just last month the Treasury responded to an official petition calling for the HMRC mileage rate to be increased from 45p/mile to 60p/mile.

The petition read: “The lack of any increase since then [2011] is a serious disincentive to volunteer drivers particularly as fuel has gone up again recently.

“Since 2011, inflation has gone up by over 25%; fuel has increased by over 20% over the last five years.

“Volunteer car drivers who did so much during Covid, and still do, to get people to healthcare settings, e.g. hospitals, vaccination centres, and to deliver shopping and prescriptions, are not being compensated fairly for the use of their cars.”

The government responded: “There are extraordinary global circumstances contributing to the sustained period of high fuel prices, among them the Russian invasion of Ukraine. At Spring Statement 2022 in response to fuel prices reaching record levels, the government announced a temporary 12-month cut to duty on petrol and diesel of 5p per litre. This cut represents savings for households and businesses worth around £2.4 billion in 2022-23.

“As with all taxes and allowances, the government keeps the AMAP rate under review.”

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