Mileage and Car Allowances
When running a business, you will find yourself confronted with many different choices as and when your business begins to grow. One such area is that surrounding the use of cars for business.
For many businesses, this will likely not be a factor, but for a growing number of small businesses, the use of vehicles for business purposes is growing. To help you get a better understanding of what is involved so that you can you make a much more informed decision, we have put together the following information regarding car allowance and car mileage for business purposes.What is the difference between car allowance & car mileage?
Whilst both are related to the use of a personal car for business purposes, they serve different needs, and are therefore also governed by different regulations. A such, before making your decision, it is best to read up on the advantages and disadvantages of both systems. To put simply, a car allowance is a payment given to an employee or yourself towards the cost of purchasing a car. This payment is added to the person’s normal salary and is then taxed at the standard rate. Meanwhile, a mileage allowance is a payment provided to an employee/yourself, and which is designed to only cover the cost of the fuel used in business journeys, as well as some additional costs towards the general wear and tear of the vehicle. It should also be noted that the mileage allowance is tax-free.
What is a car allowance?
Car allowances are often provided to employees as an alternative to giving them a company car. A car allowance is a one-time payment that must be used to purchase a vehicle that will then be used, not exclusively, for business purposes. There are usually no restrictions to the type of car that an employee is allowed to purchase, however, individual companies may have certain guidelines regarding certain specifications for the car, such as the number of seats it has and also the maximum CO2 emissions it is allowed. Once the employee has purchased the car, they are solely responsible for its upkeep, including all related costs regarding maintenance, repairs and tax. Whilst a car allowance may not be for everyone, it does offer some very specific benefits over that of a company car, including:
- Enables employees to purchase the specific car they want
- Employees with a car do not need to upgrade to a new model
- Provides employees with an asset that they can then sell on at a later date
Regarding the tax implications of receiving a car allowance, the car allowance is taxed at the person’s existing income tax rate. Therefore, if an employee is paying a higher rate of tax, they could end up paying 40% tax on the car allowance they receive – possibly resulting in the amount after tax being considerably lower than the value of having a company car.
What is a mileage allowance?
The other option for employees using their own car for business purposes is to receive a mileage allowance to cover the fuel costs of such journeys. Calculated as part of this mileage allowance is also the cost of general wear and tear incurred to the vehicle. If you use your own car for business, you will be allowed to claim a mileage allowance. You will also be able to claim a mileage allowance if you use a car that you purchased with a car allowance. Mileage allowance rates usually differ; being higher for the first 10,000 miles and then lower for any additional mileage after this.
Whilst a mileage allowance is tax-free, this only holds true until a certain point. This threshold is called the Approved Mileage Allowance Payment (AMAP) and is set by HMRC. These rates currently stand at the following:
| Vehicle Type | First 10,000 Miles | Over 10,000 Miles |
| Cars & Vans | 45p per mile | 25p per mile |
| Motorcycles | 24p per mile | 24p per mile |
| Bicycles | 20p per mile | 20p per mile |
If you are receiving less than this mileage allowance, you can make a claim with HMRC using an application called a P87 form. Alternatively, if you are receiving more than this allowance, you will be taxed for it at whatever your standard personal income tax rate is.
If you use a company car, you will not be allowed to claim a mileage allowance. However, you will be able to claim what is termed the Advisory Fuel Rate. This rate is calculated per business mile, but unlike that of the standard mile allowance, there is no flat rate. Therefore, this rate depends on factors such as the type of fuel (diesel, petrol, LPG, etc.) and the size of the engine in the car. Furthermore, this allowance is only for fuel costs, and does not include payment for general wear and tear of the car.
The choice is yours – good luck!
As you can see, there are a variety of factors that must be considered when thinking about a company car. Only after weighing up the pros and cons of both the mileage allowance and car allowance will you be able to see which best suits your specific needs. Of course, we have only provided a very general overview of what you need to know, and we recommend you do some more research once you have decided this is the route you want to take. We hope the above information has helped and shown you that whilst there are certain factors and choices you will need to consider; the actual process can be straightforward and cost effective; both to your business and your employees.
