Reimbursing employee mileage – the 45p rate

With the rapid rise in petrol prices in 2022, there have been numerous calls to increase the approved mileage rates payment (AMAP) to employees and volunteers driving their own car from the current rate of 45p per mile (for the first 10,000 miles) which has been in place since 2011. Recently I had my attention drawn to this petition which was requesting an increase to 60p per mile, to which the Treasury has responded.

The response clarifies the purpose of the rate and summarises only by stating that the rate is kept under review. It is worth noting that a change in the rate would require amending the relevant legislation, and so it is unlikely to occur outside of a budget/statement cycle.

The response does raise two points:

  • The rate is advisory and intended to create administratively simplicity. An employer can actually pay whatever rate of mileage allowance they desire.
  • Organisations can reimburse actual cost incurred, where evidence can be provided, without this resulting in a taxable benefit arising.

This effectively leaves organisations looking to increase their reimbursed mileage rate with two options:

  1. Pay more than the approved mileage rate and accept that the excess will be subject to tax.
  2. Switch to reimbursing actual cost incurred where this is above the approved rate.

Option 1 is something that we have seen some organisations start to implement. Indeed, the NHS standard terms and conditions suggest a rate of 56p per mile. As noted, the downside of this approach is that the excess paid above the approved rate of 45p will be treated as a taxable benefit and as such organisations should consider the tax payable when calculating an appropriate rate to pay.

In addition, this option increases the administrative burden of reimbursing mileage expenses, as the value of the benefit will need to be accounted. There are two options for doing this:

  • Completing P11D forms for employees by including the excess paid as a taxable benefit
  • Putting the excess amount through payroll as a taxable benefit and accounting for the tax due there.

For employees these options are more manageable but could be far more challenging when applied to volunteers given the potential need to add them to payroll systems.

Option 2 suggests a switch to reimbursing actual costs, where suitable evidence can be provided.

Obtaining appropriate evidence for the level of fuel used may be challenging but is perhaps not an insurmountable barrier. However, using the cost for fuel only is unlikely to come out to more than 45p a mile based on current petrol prices unless the employee/volunteer is using a very fuel inefficient vehicle. Indeed, the response from the Treasury regarding the current advisory rate notes is that fuel only constitutes around a third of the total costs included in the rate.

Therefore, for an employer to be able to reimburse a higher rate without a tax charge arising you would need to calculate estimates for the other costs of running the car and not just the fuel. You would then need to be able to obtain appropriate evidence for these and agree these with HMRC as being reasonable. This would likely be a significant amount of additional work with no guarantee of success given that HMRC could challenge the methodology used.

Given the challenges of reimbursing actual costs, it appears that the only practical option currently available for organisations that wish to increase their mileage rate is to accept that this will result in a taxable benefit and account for it accordingly.

Why hasn’t the rate been increased?

There are some clues as to why the rate may have remained unchanged for so long. As noted, only a third of the rate relates to fuel. While the mileage rate for employees using their own cars is unchanged, the advisory rate for fuel for a company car is updated every 3 months. Despite a significant increase in the average price of petrol used in the calculation (from 129.3 pence per litre in September 2014 to 165.1 pence in June 2022) the rates payable at both these points have barely changed.

The calculation looks at the average miles per gallon figure, and this has increased by over 20% from 43.4 to 52.7 over the same period (for an up to 1400cc car). It is possible that the Treasury is justifying the 45p rate remaining unchanged on the basis that increased fuel costs have at least been partially offset by an increase in fuel efficiency. However, this mainly only reflects newer cars, and so for those running older, less efficient cars this will provide little comfort.

Update – September 2022:

A recent ministerial statement clarified that the Government’s response to the petition was factually incorrect. Organisations can only reimburse volunteers above the approved rate where this is based on actual cost. For employees, this is not possible, meaning that Option 1, if the excess being subject to tax is the only option.