HMRC urged to increase car mileage allowances

A leading UK tax expert has urged HMRC to increase its car mileage rates.

Under the current scheme, employees travelling on business using their own vehicle can be reimbursed 45p per mile on the first 10,000 miles and 25p per mile for the remaining miles in a tax year.

The mileage allowance is designed to not only reimburse employees the fuel for using their own cars, but also considers other factors including road tax, repairs, and servicing/MOTs.

With the substantial increase in fuel prices over the past year, Dave Hedges, Tax Partner at Azets, says increasing the allowance will relieve some financial burden amid rising energy bills, inflation, and interest rates.

Dave Hedges said: “The energy price cap has risen and a reduction in oil prices has yet to be fully felt at the pumps. This, as well as a rise in almost every other bill, has led to millions of households struggling to cope.

“World events beyond our control have exasperated the situation and impacted supply chains, which has subsequently resulted in higher prices. We have seen a slight reduction in prices in recent weeks – but still only marginally down from historic highs.

“This could take years to stabilise – and an updated mileage rate model is required to ensure that it accurately reflects the dynamic market.”

The current 45p per mile rate was introduced in 2011 when petrol was an average of 133.65p per litre and diesel was 138.94p. In 2022, with motorists facing an average of 173.46p per litre for petrol (30% increase) and 184.21p per litre for diesel (33% increase), the tax free 45p per mile has remained static.

This is coupled with car list price inflation – for example, a new Vauxhall Corsa has increased in price from c£10k to c£16k.

Dave Hedges says a fairer system would be for the mileage allowance to increase in line with inflation, with the Government ban on new petrol and diesel cars not due until 2030.

He also warned businesses going above and beyond the HMRC approved mileage allowance rates to help cover the higher cost of fuel could be negatively impacting employees in the form of more tax.

Dave Hedges said: “With the cost of living still increasing rapidly, the Government must amend the mileage allowance so that much of the UK workforce is not out of pocket.

“There are nearly half a million electric cars in the UK, and higher fuel prices have prompted more people to consider making the switch. However, the increased fuel prices have created a current problem that requires an immediate solution now for those employees who either do not wish to or are unable to move away from the internal combustion engine.

“Employers could look to provide their employees with company cars or increase the travel reimbursement per mile to the employee. However, if an employer reimburses an employee more than the mileage allowance, the extra amount counts as earnings and is taxed accordingly.”

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