How to avoid a common mistake with mileage payments

Several of your employees use their personally owned vehicles for work, for which you pay a mileage allowance at HMRC’s approved rates. But there’s a potential trap that could land you with a tax and NI bill. How can you avoid it?

Mileage allowance You probably know about HMRC’s approved mileage rates (AMRs). They allow employers to pay their employees tax and NI-free payments for business mileage in privately owned cars, vans, motorcycles and bicycles. HMRC calls these approved mileage allowance payments (AMAPs). The rules are generally straightforward but there are one or two tricky aspects affecting AMAPs for cars and vans.

Two rates There are two AMRs for cars and vans. You can pay employees 45p per mile tax and NI free for the first 10,000 business miles they travel in a tax year, and 25p for additional mileage. The 10,000-mile limit is reset at the start of each tax year. It’s the resetting of this limit that can cause problems.

Timing Employees’ claims for AMAPs are, of course, made after they have completed a business journey. That might be a week or two after their journey, soon after the end of each month for those who travel often on business or, in some cases, later than that. The timing of employees’ claims is important, especially soon after the end of each tax year, because it can affect the amount payable.

The rate for payment is determined by the tax year of travel not when the AMAP is paid. If you get that wrong you could pay an employee too much and to make matters worse land yourself with a tax bill. Example. Sue is a rep for Acom Ltd. She started working for the company on 6 May 2022. She travels around 1,400 miles on business each month. She submits her expenses claims monthly. At the end of April 2023, she submitted her claim for March.

By 31 March 2023 Sue had travelled over 15,000 business miles, and in March alone 1,900 miles. Because her March expenses claim is the first for 2023/24 she thinks a new 10,000 limit has begun and so claims 45p per mile. However, she’s only entitled to 25p per mile and if she’s paid more the difference is liable to tax (but not NI). While the excess mileage payment is taxable, it isn’t liable to NI. The NI-free rate for cars and vans is 45p even for mileage in excess of 10,000.

Consequences If Acom pays Sue the £845 (1,900 x 45p) she claimed, not only has it paid her £380 too much, it ought to have added that amount to her taxable pay (but not her pay for NI purposes). By not doing so Acom has made an incorrect PAYE report which could result in HMRC penalties. Make sure that your employees (especially those responsible for checking and paying expenses claims) know how AMAPs work. You can also point out to your employees that an incorrect claim will show in their personal tax return if they complete one, which might drop them in hot water with HMRC.