What if my employer pays me more than the tax-free amount set by HMRC?

Those who use their own vehicles for business travel might be eligible for an allowance to cover some of the cost of doing so. A vehicle could be a car, van, cycle or motorcycle. Payments may be made periodically or as a lump sum and are worked out on a rate per mile basis. This type of payment does not usually qualify for tax or National Insurance Contributions (NICs).

Tax-free allowances can only be paid for business journeys. A business journey is defined as travel that an employee must undertake in order to carry out their work role. For example, delivering goods or services to a customer’s home in a private car. Any allowances paid for non-business journeys will be taxed as income, at the appropriate rate. Non-business journeys are private trips, not connected to employment. Travel to and from work is not a business journey.

The tax-free mileage rates as set by HMRC are as follows:

Up to 10,000 miles = 45p (cars and vans), 24p (motorbikes), 20p (cycles)

Each mile above 10,000 = 25p (cars and vans), 24 (motorbikes), 20p (cycles)

For those who also carry passengers an additional 5p per mile is payable.

Some employers may pay less than the rates set out above. In such cases, the employee might be able to claim Mileage Allowance Relief.

If any payment exceeds the tax-free allowance, the additional sum will be considered income and taxed as such through PAYE or via a tax return.

It is important to keep records as proof of any expenses, especially if claiming Mileage Allowance Relief.

Example 1

Clare works as a care nurse. She travels to clients’ homes on her motorbike, to help them with daily living tasks. In 2011/12 (April 6 2011 – April 5 2012) she travels 9,500 miles and receives a mileage allowance of £2,280 (24p per mile).

To work out Clare’s tax-free allowance:

9,500 x 24p = £2,280

Clare has received exactly her tax-free allowance. She does not have any tax to pay and cannot claim any mileage allowance relief.

Example 2

Katherine uses her own car to deliver goods to customers locally. Over the course of the tax year she receives a mileage allowance of 25p per mile. In 2011/12 she travels 18,000 miles and receives £4,500 towards the cost of travel.

To work out Katherine’s tax-free allowance:

1. 10,000 x 45p = £4,500

2. 8,000 x 25p = £2,000

3. £4,500 + £2,000 = £6,500 Tax-free allowance

4. £6,500 (tax-free allowance) – £4,500 (actual payment received) = £2,000

Katherine is under her tax-free mileage allowance by £2,000 and may be entitled to apply for additional Mileage Allowance Relief.

Example 3

David uses his own van to travel between his work place and his customer’s homes to measure and fit blinds. He receives an annual mileage allowance of 40p per mile. In the tax year 2011/12 he travelled 17,000 miles and received an allowance of £6,800.

To work out David’s tax-free allowance:

1. 10,000 x 45p = £4,500

2. 7,000 x 25p = £1,750

3. £4,500 + £1,750 = £6,250 tax-free allowance

4. £6,800 (actual payment received) – £6,250 (tax-free allowance) = £550

David has received £550 more than his tax-free allowance and will be required to pay tax on this figure.

Please note that the above represent illustrations only. Eligibility may vary.

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