Employing staff is very expensive. Therefore, most employers would like to be able to give their employees as much in the way of benefits as possible for as little cost. In certain circumstances employers who offer an allowance instead of company cars can reduce the amount they pay to employees and leave the employee in a better financial position.

Paying part of the car allowance as Inland Revenue Authorised Mileage Rates (AMR) is often attractive as the driver receives these payments free of tax and National Insurance. Monthly cash payments are taxed in full as if they were salary. In other words, the company can give the same amount to the driver for less total cost.

Since 6 April 2002 the AMR are:

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

Mileage allowances received in excess of the AMR will be subject to tax and National Insurance. However, if the amount received from the employer is less than the AMR, the difference can be claimed as a tax deduction against the employee’s taxable income. For example:

Samantha uses her own car for business travel. In 2003/2004 she drives a total of 12,000 business miles.

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

	£
10,000 miles @ 40p	4,000
2,000 miles @ 25p	500
Tax-free amount	4,500

Example 1: Employer pays 50p per business mile.

Samantha has additional taxable income of £1,500 (12,000 x 50p - £4,500).

Example 2: Employer pays 30p per business mile.

Samantha can claim tax relief on £900 (£4,500 - 12,000 x 30p).

Example 3: Employer does not pay any car or mileage allowances.

Samantha can claim tax relief on £4,500.

Who benefits from mileage allowances?

Individuals who drive a reasonable level of business miles in economical cars will generally be better off receiving all or most of their car allowance by way of mileage rates. Working out the optimal position for each driver involves some quite complex calculations and, if this is to be done for many drivers, financial modelling software such as Deloitte & Touche’s “Fleet Choice” is essential.

What other pitfalls can occur?

When you pay cash as an allowance the driver receives a set amount usually through payroll. When using mileage rates the total amount received by the driver in any period will be dependent on the business mileage driven. Drivers whose circumstances unexpectedly change can find themselves considerably better or worse off. It is also prudent for the company to be on the look out for creative mileage claims.

How do I explain the cash allowance/mileage rates to employees?

One of the most common reasons why employees don’t take cash is that they don’t think they are receiving enough to keep them financially neutral. Employees really need to be able to calculate and understand their position. Many software programmes are available to help do this, such as Deloitte & Touche’s Driver Choice calculator at www.cartax.co.uk

In summary, it is possible to design and operate a very effective car scheme using mileage rates as well as, or instead of, cash allowances. However, before you start burning those calculator batteries, it is essential that you look at the profile of your cars and drivers before making any radical decisions.

David Rawlings
Senior Manager
Deloitte & Touche