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Have you ever wondered if paying employees a higher mileage rate could trigger tax consequences? Many businesses use mileage allowances to reimburse employees who drive their cars for work. Yet, if you exceed certain limits, you could face unexpected tax bills.
The Approved Mileage Allowance Payments (AMAPs) Scheme
The AMAP scheme exists to keep things simple and fair. It sets a maximum tax-free amount that employers can pay workers who drive their own vehicles for business. This scheme does not apply to employees with company cars. Instead, it covers those who use personal cars, motorcycles, or even bicycles for work-related trips.
Each year, you calculate an “approved amount” by multiplying the total business miles driven by a specific approved rate. Importantly, you look at the total mileage for the entire tax year rather than on a trip-by-trip basis. This means you only decide if you’ve gone over or stayed within the approved amount after tallying all the miles for the year.
Current Approved Rates
HM Revenue & Customs (HMRC) sets the approved rates for different vehicle types. Here they are:
- Cars and Vans:
- First 10,000 business miles in a tax year: 45p per mile
- Anything above 10,000 miles: 25p per mile
- Motorcycles: 24p per mile
- Cycles: 20p per mile
These rates remain the maximum that can be paid tax-free. If your employees’ actual costs are higher, you generally cannot raise the tax-free amount to match those costs. Instead, you’d have to pay the extra, but that overage becomes taxable income for your employees.
Example of the Approved Amount
Let’s look at a simple example:
- John drives 12,000 miles in a tax year for business.
- Under the AMAP scheme, his approved amount equals:
- 10,000 miles × 45p = £4,500
- 2,000 miles × 25p = £500
- So, the total approved amount is £5,000.
An employer could pay John up to £5,000 for these business miles without creating extra tax worries for either party. If the employer pays exactly £5,000 or less, it’s completely tax-free.
What If You Pay More Than the Approved Amount?
Here’s where the curiosity often kicks in: What if you decide to pay more than these set rates? In that scenario, anything over the approved amount for the entire tax year is considered taxable income.
It’s important to remember that you do not determine this on a journey-by-journey basis. Even if an employee receives a high rate for a specific trip, you only look at the grand total at the end of the year. If that total stays under or matches the approved amount, there’s no tax to worry about.
Paying Less Than the Approved Amount
Sometimes, an employer chooses to pay a lower rate than the approved amount to keep costs down or simplify the system. If that happens and an employee receives less than the total approved amount, they can claim tax relief for the shortfall. In other words, employees don’t lose out entirely; the tax system allows them to make up the difference when they file their tax returns.
If no mileage payment is given at all, employees can still claim tax relief based on the approved rates for the miles they’ve driven for work.
National Insurance Considerations
National Insurance (NIC) rules are slightly different. While a similar approach applies, the NIC-free allowance is calculated for each pay period rather than across the entire tax year at once. For cars and vans, an NIC-free rate of 45p per mile applies regardless of how many miles are driven during the year. This means there isn’t a drop to 25p after 10,000 miles for NIC purposes.
Sticking to the AMAP scheme minimises tax issues while compensating employees using their own vehicles. Any payments above the rates are taxable income, so remember these rules to avoid tax surprises and stay compliant with HMRC.