Changes to the tax/NICs rules that apply to car and mileage allowances
paid by employers to employees who use their own cars for work, to encourage
the use of more environmentally friendly cars, were announced in the pre
The changes, which will cost the Exchequer £45 million if implemented
in full, follow a review, announced in Budget 2000, of how the authorised
mileage rates (AMRs) for individuals who use their own cars for business
journeys might be improved to send better environmental signals.
1. The Inland Revenue authorised mileage rates provide an easy
guide for employers to the levels of mileage allowances that may be paid
free of income tax and NICs to employees who use their own cars, pedal
cycles and motorcycles, for business travel.
Car mileage rates
2. The AMRs which will apply for business mileage in the year
2001-02 (with the 2000-01 rates shown in brackets) are:
Authorised rate per mile
Size of car engine
on the first 4,000 miles in the tax year
on each mile over 4,000 miles in the tax
up to 1,000 cc
1,001cc - 1,500 cc
1,501cc - 2,000 cc
over 2,000 cc
3. Under the Car Allowances Enhanced Reporting Scheme (CAERS)
employers can use the car mileage rates to calculate and report profit
or excess expenditure on the motor mileage allowances they pay to their
employees on an individualised basis. The rates also underpin the Fixed
Profit Car Scheme (FPCS) reporting arrangements. Both the CAERS and the
FPCS are voluntary, administrative arrangements for taxing motor mileage
allowances paid by employers to employees who use their own cars for work.
4. Where employers using the FPCS pay different mileage rates
for cars of different engine sizes, the scheme works by matching the FPCS
bands as closely as possible with the engine bands used by the employer.
Where employers pay the same rate of mileage allowances whatever size
of car the employees use for business, the average of the two middle bands
is used. The average of the two middle bands for 2001-02 is 42.5p for
the first 4,000 business miles and 25p thereafter.
5. All employees, whether or not included in a CAERS or FPCS,
can use the authorised rates to calculate any taxable profit on car allowances
and motor mileage allowances they receive. In addition, employees may
use the authorised rates to support a tax deduction for business motoring
expenses, whether or not they are paid car or mileage allowances by their
employer. Using the authorised mileage rates means that it is not necessary
to keep detailed records of the cost of business motoring. Employees who
consider that the rates do not reflect their particular circumstances
may use their actual costs of business motoring to calculate their tax
Bicycle mileage rate
6. Currently, employers can pay up to 12p per mile to their employees
tax free for using their own bicycles for business travel. Employees can
claim tax relief on 12p per business mile if their employer pays no bicycle
allowance, or on the balance up to 12p per mile if the employer pays less
than this rate. Motorcycle mileage rate
7. Similarly, employers can pay up to 24p per mile tax free to
their employees who use their own motorcycles for business travel. Employees
can claim tax relief on 24p per business mile if their employer pays no
motorcycle allowance, or on the balance up to 24p per mile if the employer
pays less than this rate.
For 2002-2003 - proposed rates
8. As announced in the pre-Budget Report, the Government will
consult with interested parties on the introduction of a new system of
statutory authorised mileage rates from April 2002. The tax free rates
for cars and cycles which will apply from 6 April 2002 are as follows:
|On the first 10,000 miles in the tax year
||40p per mile
|On each additional mile over 10,000 miles
||25p per mile
||24p per mile
||20p per mile
To encourage car sharing by employees, employers will be able, if they
wish, to pay, tax and NICs free, 2p per mile for each passenger carried.
9. The proposed new rates for cars will provide a clear incentive
for people to use smaller, more efficient private cars for business trip
by offering a single tax and NICs free rate for all vehicles. Employees
will still be able to claim back tax relief on the difference if their
employers pay less than the statutory rate. But as a consequence of moving
to statutory rates, employees will no longer be able to claim actual business
motoring/cycling costs if these are above the statutory rate. The interest
on a loan taken out for the purchase of a car or cycle used for business,
and capital allowances for depreciation will be included in the calculation
of the statutory rate so additional relief will not be available.
10. The existence of the new statutory rates will not prevent
employers paying higher rates if they choose to do so, but any amount
paid in excess of the statutory rates will be taxable.
Notes For Editors
Current tax treatment of Mileage Allowances
11. Many employers pay allowances to employees who use their own
cars, pedal cycles or motorcycles for business. These payments are taxable
to the extent that they exceed the motoring or cycling costs for which
tax relief is due.
12. The law provides for employers to return details to tax offices
of the amounts paid to individual employees. Employees then have to make
detailed claims for relief based on their actual motoring or cycling expenditure.
The tax office assesses each employee on any taxable profit - the excess
of what the employee receives over the allowable costs incurred.
Fixed Profit Car Scheme
13. To simplify this procedure, the Inland Revenue operate an
administrative arrangement known as the Fixed Profit Car Scheme (FPCS).
Under this scheme, taxable profits are calculated by reference to the
Inland Revenue car mileage rates. These are mileage rates fixed by the
Inland Revenue each year which are estimates of the average tax-allowable
costs for a range of car engine sizes. The estimates are based on a proportion
of the routine costs (such as depreciation, servicing, insurance and road
tax) and all the running costs (such as fuel) attributable to the business
14. The FPCS reduces the need for employers and employees to keep
records. And it makes it easier for any tax payable to be collected by
adjustment to the employee's tax code.
15. Employers who wish to operate a FPCS should contact their
tax office to set up the arrangements.
Use of Inland Revenue car mileage rates by employees who are not
in a FPCS
16. Any employee who uses his or her own car for business travel
is able to use the Inland Revenue car mileage rates to calculate any taxable
profit on car allowances and motor mileage allowances received. In addition,
employees may also use the rates to support a tax deduction for business
motoring expenses, whether or not they are paid car or mileage allowances
by their employer.
17. If the total car and motor mileage allowances paid are more
than the sum calculated using the Inland Revenue car mileage rates then
the employee is taxed on the difference. If they are less, then the employee
can use the rates to calculate the allowable business motoring expenses.
But the allowances actually received from the employer must be taken into
account when calculating the tax deduction for allowable motoring expenses.
18. Using the Inland Revenue mileage rates gives taxpayers a simpler
way of working out the allowable cost of their business motoring. It means
the employee only needs to keep a simple record of business mileage and
total allowances received rather than full details of motoring expenses
for the year.
Car Allowances Enhanced Reporting Scheme (CAERS)
19. Under CAERS, employers report profit or excess expenditure
on the motor mileage allowances they pay to their employees on an individualised
basis. Employers who do this must apply the Inland Revenue's authorised
car mileage rates to the full amount of each employee's qualifying business
travel to calculate the amount to be set against the allowances paid,
so that, in effect, the calculation is the same as if it had been done
by the employee.
Right of employees to opt out of FPCS or not to use the authorised
20. Employees can be taxed on the strict statutory basis if they
keep the necessary records of motoring expenses and business and private
(including ordinary commuting) mileage. Employees may use the Inland Revenue
mileage rates on an individual basis if they do not want to be dealt with
under their employer's FPCS.
Use of authorised mileage rates by the self-employed and volunteer
21. Self-employed taxpayers with a turnover which does not exceed
the VAT registration threshold may use the car, pedal cycle or motorcycle
authorised mileage rates as an alternative to keeping detailed records
of their actual motoring or cycling expenditure. Volunteer drivers can
use the authorised car mileage rates to calculate the profit on mileage
allowances they receive from hospitals, social service agencies and other
voluntary organisations. While the new rates for employees will be obligatory
from 6 April 2002, the small turnover self employed and volunteer drivers
will still have the option of claiming for their actual business motoring,
or volunteer driving, expenses.
22. Interest paid on a loan taken out for the purchase of a car,
pedal cycle or motorcycle used for business purposes may qualify for tax
relief. Relief for interest is not included in the authorised rates. It
needs to be claimed separately.
23. If employers intend to pay allowances at or below the appropriate
rates for cars shown in the table on page 2 of this news release, or
the 12p and 24p authorised rates for pedal cycle and motorcycles respectively,
they may apply to their tax office for a dispensation. A dispensation
is a notice from the Tax Inspector that relieves employers from reporting
expenses payments at the end of the year. A dispensation may be given
where the Inspector is sure that
- no tax would be payable by the employees on the expenses payments
- expenses claims are independently checked and authorised within the
firm and, where possible, receipts go with the claims.
Current NICs treatment
24. For National Insurance, employers use the up-to-4,000 mile
authorised rates to determine whether NICs are payable on mileage allowances.
For pedal cycle and motorcycle allowances, there will be no NICs liability
if employees are paid at or below the authorised rates of 12p per mile
for pedal cycles and 24p per mile for motorcycles. And no NICs liability
will arise if the amounts paid are covered by an Inland Revenue dispensation.
25. You can find out more about dispensations by asking your local
tax office or by obtaining a copy of the Inland Revenue leaflet IR69:
"Expenses payments and benefits in kind. How to save yourself work". The
Inland Revenue also publishes a leaflet for employees, IR125: "Using your
own car or motor bike for work", which explains the tax position where
an employee uses his or her own car or motor cycle to make business journeys.
Inland Revenue leaflets are available from any Inland Revenue Enquiry
Centre or Tax Office. They are also available from the Inland Revenue
Information Centre, SW Bush House, Strand, London WC2B 4RD.