If an employer covers the cost of employees using their own vehicles for business purpose then there are certain National Insurance (NI), tax and reporting obligations. There are 2 separate methods of dealing with mileage expenses: one is for taxation and the other for NI.
If the salary of an employee is above a primary threshold, an employer has to report payments of car Mileage to HMRC on p11d returns. The applicable tax is deducted and paid to HMRC. There is a specific allowance for the mobile force. Mileage Allowance Payments (MAP) is paid to the employees for using their own vehicle for business activities like client meetings, and other business development activities. Each employer is permitted to pay a certain MAP amount to the employee for each year and this amount known as an 'approved amount' does not have to be reported to HMRC.
In order to compute the 'approved amount' an employer simply needs to multiply the employee's business travel miles during a year with the rate per mile for the employee. It doesn't matter if an employee uses more than one vehicle in a year for business activites as computation takes place collectively. For example, an employee travels 12,000 business miles in his / her own car or van. According to the below table, the approved amount for the year would be £5,000 (£10,000 * 45p + 2,000 * 25p)
Tax rates per business mile
If the amount is above the 'approved amount', an employer must provide details of the same on form P11D. If the payments are below Approved mileage payment, an employee will be able to get Mileage Allowance Relief (MAR) only on the unused balance of the approved amount. In such a case, a separate optional report can be made to HMRC for any such unused balances under the Mileage Allowance Relief Optional Reporting Scheme (MARORS).
National Insurance (NI) rules
Under this rule, an employer has to deduct and pay NI on payments pertaining to motoring expenditure (RME), which includes:
- Mileage Allowance Payments (MAPs)
- payments that would qualify under MAPs, but, for employee's benefit are paid to another person than the employee
- any additional cash payments made to the employee towards the use of their vehicle A 'qualifying amount' is referred to a certain amount of RME that will be exempt from reporting to HMRC or paying National Insurance on. For example: If an employee drives 1000 miles in their van, and an employer makes a RME payment to cover this then as per the rates in the below table the qualifying amount for the earnings for the period would be £450 (£1,000 x 45p).
NI rates per business mile
If the RME, provided to an employee, in the earnings period exceeds the qualifying amount then an employer needs to add the excess amount to other earnings while computing Class 1 NI (but not Pay-as-you-earn (PAYE) tax) through payroll. On the other hand, if the RME is below the qualifying amount, an employer does not have to report anything and no National Insurance has to be paid. There is no MAR for National Insurance, and it is not possible to carry forward the difference between RME and the qualifying amount to a later earnings period.
Advisory Fuel Rates from 1 December 2016
These rates only apply to employees using a company car and are applicable post 1 December 2016.
Employee using their own vehicle: If employees use their own vehicle for business purpose, they can claim 'Mileage Allowance Relief'. MAR is computed by adding the business mileage for the tax year and then multiply it with the approved mileage rates. An employee must keep records of the dates and miles traveled during work hours for official purpose
- If an employer does not pay a mileage allowance, an employee can claim the full approved amount of MAR
- If an employer pays a mileage allowance which is less than the approved amount, an employee can claim MAR on the difference
- If an employer pays more than the approved amount, an employee will have to pay tax on the difference
Employee using multiple vehicles: All the business miles need to be combined for the same type of vehicle. Miles need to be calculated separately for different types of vehicles
Employee using a company car for business: An employee can claim tax relief on the money spent on fuel or electricity for business trips in the company car. Keep records to show the actual cost of the fuel or electricity bought/used. If an employer does not reimburse the entire amount, employees are eligible to claim relief on the difference
Benefits of working with DNS Accountants
DNS works with clients to enable them grow the business and maximise profits. DNS aims to deliver high-quality customer service and help clients focus on the core business activities. Our services include auto enrolment, bookkeeping and accounting services, payroll services, self assessment, individual and business taxation, value added tax (VAT) planning, property tax advisory and consulting services for construction industry. Our additional services include:
- Assisting clients in setting up their business bank account based on their needs
- Preparation of year end accounts
- Company formation services including bank account opening, and registration of pay-as-you-earn (PAYE) and value added tax (VAT)
- UK Limited Company Formation for Non-Residents
- Writing business plans
- Tax investigation cover service