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LITRG explains what to do if your employer pays you less than the HMRC-approved business mileage rates, particularly noting a change in the rates from 6 April 2011.
 

Introduction

Employees needing to use their own vehicle  to carry out the duties of their job often find that their employer reimburses them on a “pence per mile” basis.

In order to avoid employers reporting expense payments for qualifying business travel to HMRC, against which employees would have to claim tax relief, tax law includes authorised amounts up to which employers can pay without an income tax or national insurance (NIC) liability.

The Budget change

In the Budget, the rate for the first 10,000 miles in a car or van was increased from 40p per mile to 45p per mile, effective from 6 April 2011. The approved rates are now as follows:

Note that your employer does not have to reimburse you at the above rates. They may not reimburse you at all (although reasonable employers will usually do so) or they may do so at a rate less than the approved amount. It is rare than an employer will pay more than the HMRC-approved rates – if they do so, it is likely you will be taxed on the excess as a benefit in kind.

The HMRC rate has increased but my employer isn’t paying the extra!

Times are tight for many businesses, so although the HMRC-approved rate has been increased, your employer might not be inclined to match it. Or indeed perhaps your employer was already paying less than the approved rates.

This can open up an opportunity for you to claim tax relief on the difference between what your employer pays you and the approved rate. The amounts could be significant, depending on how many business miles you do.

Note, however, that you can only claim tax relief from HMRC and not the actual amount not reimbursed. An example will help to explain.

Jilly

Jilly works for an agency as a carer, travelling around providing home help. She drives a total of 8,000 business miles in her own car in the 2011/12 tax year. The agency is still paying 40p per mile, not having increased the rate to match the new HMRC-approved rate of 45p for the first 10,000 business miles.

Jilly is entitled to tax relief on:
8,000 miles x 45p per mile =              £3,600

But she has only received:
8,000 miles x 40p per mile =              £3,200

She can claim tax relief on the difference of £400. As Jilly is a basic rate taxpayer, that is, paying tax at 20%, the tax relief HMRC will pay to her on a claim is:

Tax relief, £400 x 20% =                    £80

In the above example, the agency could have paid Jilly the extra £400 without any tax or NIC liability arising, but as they did not do so, she can only claim tax relief on the difference. And unfortunately, she cannot claim any relief from NIC, even though the additional £400 could have been paid to her free from NIC.

Keep records now to support a claim after the tax year ends on 6 April 2012

Keep a log of your total business mileage during the year and what allowances your employer paid to you so that, after 6 April 2012, you can write to HMRC with details of your business mileage and ask them for a refund.

Tax credits

Note also that you can claim a similar deduction from your income for the purposes of calculating tax credits. So in the above example of Jilly, the wages included in her tax credits calculation should also be reduced by £400, that is, the same amount she was entitled to tax relief on as a result of her employer not matching the HMRC-approved mileage rates.

Where can I find out more?

A more detailed description of the tax situation on employee business mileage is given in the low-income workers section of the LITRG website.