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TaxationWeb’s Lee Sharpe offers some guidance for general employees and director-shareholders hoping to get the best out of motor mileage claims.

Introduction

This article will take a look at the standard mileage claim for motoring expenses, and outline which is better, for:

1. Standard employees – where the employee is concerned only with his or her own personal financial position; and
2. Director and shareholder of own company – who will be concerned about overall tax-efficiency, both personal and corporate

Standard Mileage Claim

The standard claim is - for now, although we have written separately that it seems high time the rates were increased:

• 45p per qualifying business mile for the first 10,000 qualifying business miles in the tax year, followed by
• 25p per qualifying business mile above that

If the employer reimburses at a higher rate than those “approved by HMRC”, then the employee will be taxable on the excess. NICs will also be due if the reimbursement exceeds 45p per business mile.

Standard Employee Calculation

If we assume that the average employee (who is not a director or shareholder in his employer’s business) is concerned only with maximising their personal financial efficiency, then it will be better for them to be reimbursed for their qualifying work mileage by their employer, at the maximum permitted rate.

Example

Boris uses his own car for work: in 2022/23 he covers 20,000 qualifying work miles for his employer.

Mileage Reimbursed at Maximum Allowed Rate

If his employer ParteeFun Ltd. reimburses Boris at the maximum permissible rate, then Boris could receive:

10,000 x 45p + 10,000 x 25p = £7,000 towards the total cost of running his car, free of tax and NICs.

Partial Reimbursement (or NIL Reimbursement)

But if his employer reimbursed at only (say) 15p per work mile, then Boris would receive:

20,000 x 15p = £3,000 free of tax and NICs from his employer

However, he could then also make a claim to HMRC under the Mileage Allowance Relief rules for the shortfall in rate reimbursed, being the maximum allowed less what was already reimbursed:

10,000 x (45p-15p) + 10,000 x (25p-15p) = £4,000

Even so, the claim he makes personally to HMRC will only get him tax relief on the £4,000, rather than the full £4,000 itself. Assuming Boris is a Basic Rate taxpayer at 20%, he will physically get back:

£4,000 x 20% = £800

Therefore, while the tax relief is welcome, Boris would be much better off if his employer reimbursed to the full extent of the permitted rates.

Of course, if Boris is a 40% Higher Rate taxpayer, then the personal tax claim is worth more:

£4,000 x 40% = £1,600

Boris should keep in mind that using the claim to reduce his taxable income should also reduce exposure for other income-oriented adjustments, such as the High Income Child Benefit Clawback. Nevertheless, full reimbursement by the employer in the first place, is practically always better than making a tax claim for any shortfall.

Tax Relief for the Employer - Cheaper All Around

It is worth keeping in mind that the employer will invariably get business tax relief for any mileage paid under the approved regime: it will reduce their taxable profits.

This means that if Boris’ employer is a limited company, paying Boris the maximum mileage rate instead of (say) just 15p per business mile will actually cost the employer only 81p per £1 of extra reimbursement, as it will be saving 19% Corporation Tax on the additional payment, (assuming it is a profitable business), so:

10,000 x (45p-15p) + 10,000 x (25p-15p) = £4,000 @ 81% = £3,240

In other words, it would cost a limited company employer only £3,240 to have put an extra £4,000 of tax-free reimbursement into Boris’ hands, by topping up the mileage rates to the approved maximum.

If instead Boris’ employer were a trading partnership, likely subject to 40% Higher Rate Income Tax and 3.25% Class 4 NICs, (in 2002/03), then it will cost them only 56.75p per £1 of extra reimbursement, as the partnership would be saving a combined 43.25% in tax and NICs on the extra payment, so:

10,000 x (45p-15p) + 10,000 x (25p-15p) = £4,000 @ 56.75% = £2,270

In other words, it would cost an employer that was itself operating on a self-employed basis, (and paying Higher Rate tax), only £2,270 to have put an extra £4,000 of tax-free cash into Boris’ hands, by topping up the mileage rates to the approved maximum.

Director/Shareholder of Own Company

The calculations here are more involved. One assumes that an ‘ordinary’ employee is concerned mainly with securing the most net money, after pay, reimbursements and tax claims.

But a director/shareholder of their own company will also have to consider the implications for their company as employer, and what the tax costs will be in the company, as well as personally.

We shall cover a rough example for simplicity, and then a more thorough analysis for those who are more mathematically inclined.

Example

Let’s take Keira, who is director and shareholder of her legal advisor limited company, Boring Legal Ltd. Keira also covers 20,000 qualifying business miles in 2022/23.

Mileage Reimbursed at Maximum Allowed Rate

If Boring Legal Ltd. reimburses at the maximum rate permitted by HMRC, then it will amount to

10,000 x 45p + 10,000 x 25p = £7,000 towards the total cost of running Keira’s car, free of tax and NICs.

The company will have saved £7,000 x 19% = £1,330 in Corporation Tax as well, since the payment to Keira will reduce its taxable business profits by £7,000. This totals £8,330 across the board.

Partial Reimbursement (or NIL Reimbursement)

Let’s suppose that Boring Legal Ltd. reimburses only 20pence per work mile. The reimbursement becomes

20,000 x 20p = £4,000 free of tax and NICs from his employer

However, Keira could then make a claim to HMRC under the Mileage Allowance Relief rules for the shortfall in rate reimbursed, being the maximum allowed less what was already reimbursed:

10,000 x (45p-20p) + 10,000 x (25p-20p) = £3,000

But the claim she makes personally to HMRC will only get her tax relief on the £3,000, rather than the full £3,000 itself. Assuming Keira is a Higher Rate taxpayer at 40%, she will physically get back:

£3,000 x 40% = £1,200.

Meanwhile, Boring Legal Ltd. will have saved £3,000 @ 19% in Corporation Tax, on the lower mileage reimbursement.

The total saving across the board will be £3,000 reimbursed + £1,200 tax rebate for Keira, and £570 saving in Corporation Tax for Boring Legal Ltd. This totals £4,770 across the board.

More Thorough Analysis

The foregoing should hopefully suffice as a rough guide. But to test the mathematics more rigorously, arguably the best method is to assume that in each scenario, Keira needs the same amount of money in her hand, after tax, etc., and to watch how the company is affected. It may not actually be the director/shareholder's intention in real life, but the exercise should demonstrate the efficiency (or not) of different routes. Clearly, if the company is going to reimburse only a lower amount for the mileage itself, it will have to pay something over to Keira in a different way – salary, or a dividend:

Note that:

• We have assumed for simplicity that, if Keira is paid an extra dividend, she was already paying tax on dividend income at 33.75%; if she was paid extra salary, she was already paying tax on salary at 40%. Also that, when Keira makes her claim for personal tax relief on the non-reimbursed mileage allowance, it will be deducted against salary taxable at 40%, in either of the 20p per mile reimbursement scenarios.
• Boring Legal Ltd. can save Corporation Tax on paying mileage, and generally on paying salary or a bonus – including Employers’ NICs. But there is no Corporation Tax saving on dividends paid to Keira, because dividends are paid out after Corporation Tax has been paid – i.e., out of “post-tax profits”.
• The most tax-efficient overall route for Keira and her company Boring Legal Ltd. is for the company to reimburse at the maximum approved mileage rates. If it reimburses at lesser rates then, while Keira can claim some personal tax relief under the Mileage Allowance Relief rules, more taxable income is required to make up the shortfall. As might be expected for 2022/23, it is more tax-efficient for the company to make up the difference using dividend income than using salary – mainly because paying additional salary means that both Employees’ and Employers’ NICs have to be accounted for. This may change from April 2023, when Corporation Tax rates are set to rise significantly, so being able to save Corporation Tax - such as when paying a bonus but not when paying dividends - will be more valuable.

Conclusion

Whether you are a ‘normal employee’ or a director/shareholder in your own company, reimbursing qualifying mileage for using your own private vehicle for work purposes is most tax-efficient if it is done at the maximum allowable rate. The employer also benefits from tax relief on business profits, so it really is a shame that the rates have not kept pace with rising motoring expenses!