What is mileage allowance?

How does mileage allowance work?

Rather than keeping every fuel receipt, insurance renewal and garage bill and apportioning them between business and private use, you count business miles and multiply by HMRC's rate. The rate is intended to cover fuel, wear, insurance, tax and depreciation all together, so nothing else about the vehicle is claimed on top.

For a sole trader it is an allowable expense against profit. For an employee using their own car for work it is the maximum an employer can reimburse tax-free; if the employer pays less, the employee can claim tax relief on the difference. Either way the evidence is the same: a log of each business journey with the date, destination, purpose and miles.

Business miles are journeys for the trade — to a customer, a supplier, a site, a trade show. Ordinary commuting to a fixed place of work is not business travel, and neither is a journey that is mostly personal with a work errand attached.

A worked example

A mobile hairdresser drives 12,400 business miles in the tax year visiting clients. The first 10,000 miles at 45p come to £4,500, and the remaining 2,400 at 25p come to £600. Her mileage claim is £5,100, deducted from profit on her Self Assessment return.

She also drove about 4,000 personal miles, which do not appear anywhere. Had she chosen to claim actual costs instead, she would have totalled every vehicle expense for the year and claimed the business proportion, roughly three quarters of it, plus a capital allowance on the car. Whichever method she picks for that car, she sticks with it while she owns it.

If she employed an assistant who used their own car for 3,000 business miles and was reimbursed at 30p, the assistant would have received £900 but been entitled to £1,350 tax-free, and could claim tax relief on the £450 shortfall.

What are the rates?

These rates have been unchanged for many years. An extra passenger allowance exists for employees carrying colleagues on business journeys; check the current figure on gov.uk.