If an employee provides his own motor car for business travel, it is common for the employer to pay not only the cost of the petrol used, but also a contribution to the running expenses and depreciation of the car.

The Inland Revenue annually publish rates which represent the maximum mileage allowance that may be paid without accounting for income tax or National Insurance. These are known as the approved mileage rates (AMR).

It is no longer possible to make a claim for tax relief on loan interest to buy a car, nor is it possible to claim capital allowances or tax relief for the actual expenses incurred in running a car.

Approved mileage rates (AMR)

The rates are as follows:

Engine Capacity Upto 10,000 Miles Over 10,000 Miles All Cars and Vans 40p 25p

The Inland Revenue allow a higher rate on the first 10,000 miles as many of the expenses associated with motoring are fixed (road fund licence, insurance, etc.)

As a result of the AMR, it is possible to design remuneration packages that make it advantageous for employees to use their own car for business purposes, rather than take a company car. For example, by offering a salary alternative and the maximum mileage rates it may be possible to provide the employee with similar benefits but at a reduced cost to the employer.

Mileage allowances received in excess of the AMR will be taxable and may also be subject to National Insurance. If the AMR exceeds the amount received from the employer, the difference can be claimed as a tax deduction against the employee’s taxable income. This is called mileage allowance relief. To make a claim the employee needs to keep a record of his business miles and the mileage allowance payments received from the employer. There is no equivalent relief for National Insurance.

If the employee has more than one employment, the 10,000 mile limit is available for each employment. However, where the two (or more) employments are with the same employer or with different employers who are under the same control (e.g. companies in a group) only one 10,000 limit is available.

George uses his own 1.8 litre car for business travel. In 2003/2004 he drives a total of 17,000 business miles.

The tax-free amount representing allowable business motoring costs would be:

£ 10,000 miles at 40p 4,000 7,000 miles at 25p 1,750 Tax-free amount 5,750

Example 1: Employer pays 50p per business mile.

George has additional taxable income of £2,750 (17,000 x 50p - £5,750).

Example 2: Employer pays 30p per business mile.

George can claim tax relief on £650 (£5,750 - 17,000 x 30p).

Example 3: Employer does not pay any allowances.

George can claim tax relief on £5,750.

Example 4: Employer pays 45p per mile but only on the first 15,000 miles. Thereafter no allowances are paid.

George has additional taxable income of £1,000 (15,000 x 45p - £5,750).

Example 5: Employer pays £100 per month plus 20p per business mile.

George can claim tax relief on £1,150 (£5,750 - £100 x 12 - 17,000 x 20p).

If George receives a self assessment return the claim will need to be included on the return in box ‘1.32’ of the employment supplementary section. (This may not be the only claim that will need to be entered within that box). If he does not receive a return he should write to his tax office to make the claim.