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Business Services  •  Business Tax  •  Personal Taxation

Mileage rates make business use of personally owned cars unviable

By RJP LLP on 28 July 2022

My most recent visit to the petrol station really highlighted just how much fuel costs have increased in recent months – filing up my car cost double what it did three years ago. Inflation is now running at a 40-year high, but unlike prices for most goods and services, tax allowances set by HMRC have typically stayed the same for many years.

One of the most long-standing official rates is the 45p mileage rate, which has been unchanged for over a decade. When it was first set in 2011 it was probably a fair level of remuneration for the first 10,000 business miles travelled in a personally owned car in a tax year. It is now probably costing employees more in fuel than can be reimbursed for tax free, bearing in mind the rate is  supposed to also cover the cost of the appropriate wear and tear of the vehicle.

The accountancy industry is currently calling for the mileage rate to be increased to 90p per mile during the current cost of living crisis, which seems a fair adjustment. This frozen allowance is catching a lot of taxpayers out. Due to the increased cost of company car ownership, many people have opted to use their own personal vehicle for work purposes and be reimbursed for mileage. Now they are finding themselves out of pocket.

It is possible for employers to voluntarily increase the mileage rate beyond 45p to counter this increased cost, but this is treated as a taxable benefit in kind, which further disadvantages the employee. It is also more complicated to administer. Experts are arguing the fairest way forward would be for the government to increase the tax free mileage allowance rate so that it is ‘tax neutral’ for employers and employees. This would mean increased costs for businesses, but since the additional expense is tax deductible, the net effect could be nil. They argue this is a better approach than cutting fuel duty, because it would support those who are specifically affected rather than represent a blanket increase.

Mileage rates are not the only reason why taxpayers are finding themselves out of pocket due to tax policies, read our other blog about the impact of frozen income tax thresholds.

If you would like to discuss ways you or your business can save tax, please contact us via partners@rjp.co.uk

 

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My most recent visit to the petrol station really highlighted just how much fuel costs have increased in recent months – filing up my car cost double what it did three years ago. Inflation is now running at a 40-year high, but unlike prices for most goods and services, tax allowances set by HMRC have typically stayed the same for many years.

One of the most long-standing official rates is the 45p mileage rate, which has been unchanged for over a decade. When it was first set in 2011 it was probably a fair level of remuneration for the first 10,000 business miles travelled in a personally owned car in a tax year. It is now probably costing employees more in fuel than can be reimbursed for tax free, bearing in mind the rate is  supposed to also cover the cost of the appropriate wear and tear of the vehicle.

The accountancy industry is currently calling for the mileage rate to be increased to 90p per mile during the current cost of living crisis, which seems a fair adjustment. This frozen allowance is catching a lot of taxpayers out. Due to the increased cost of company car ownership, many people have opted to use their own personal vehicle for work purposes and be reimbursed for mileage. Now they are finding themselves out of pocket.

It is possible for employers to voluntarily increase the mileage rate beyond 45p to counter this increased cost, but this is treated as a taxable benefit in kind, which further disadvantages the employee. It is also more complicated to administer. Experts are arguing the fairest way forward would be for the government to increase the tax free mileage allowance rate so that it is ‘tax neutral’ for employers and employees. This would mean increased costs for businesses, but since the additional expense is tax deductible, the net effect could be nil. They argue this is a better approach than cutting fuel duty, because it would support those who are specifically affected rather than represent a blanket increase.

Mileage rates are not the only reason why taxpayers are finding themselves out of pocket due to tax policies, read our other blog about the impact of frozen income tax thresholds.

If you would like to discuss ways you or your business can save tax, please contact us via partners@rjp.co.uk