If you use your own car on business travel for your employer you will normally be eligible for tax relief on the costs of running your own car.
Similarly, if you give up a company car and take a cash allowance instead you will normally stop paying tax on company car benefit and instead pay tax on your cash allowance, but you can then offset some of your car's running costs against tax.
How Is Tax Relief Given for Business Motoring?
Tax relief is given though a mileage based system that gives a tax deduction for each business mile travelled during the tax year. The system is called 'AMAPS' (HM Revenue & Customs' Authorised Mileage Allowance Payments).
Under 'AMAPS' your employer can pay you a tax-free mileage-based allowance for using your own car for business motoring.
Alternatively, you can claim tax relief for business motoring at the AMAPS rates if you don't receive a mileage allowance or if your mileage allowance is less than the AMAPS rate.
What Does AMAPS Cover?
The AMAPS system is designed to provide you with tax relief for the costs of running a car, such as depreciation, maintenance, fuel, insurance and the tax disc.
How does AMAPS work?
Under the AMAPS system, HM Revenue & Customs sets two tax-free mileage allowance rates:
||The full rate can be paid tax-free to you by your employer for the first 10,000 business miles travelled in the tax year.
||The lower rate can be paid tax-free for business mileage over 10,000 miles during the tax year.
If your employer pays you more than the total allowed under the HM Revenue & Customs rates then the excess amount is taxed.
Why Two AMAPS Rates?
The HM Revenue & Customs considers that fixed costs such as insurance and the annual tax disc don't vary, no matter how many miles you drive each year.
As the amount of the full rate of AMAPS allowance includes a proportion of these fixed cost items, once you have travelled more than a certain number of business miles each tax year you will have been given tax relief in full for the fixed costs.
So, once you exceed the business mileage limit, for any travel over and above the limit you only need to be given tax relief at a lower rate to cover just the variable costs (depreciation, etc) and not the fixed costs.
In other words, you get tax relief above the business mileage limit only for the costs that continue to increase with each additional mile you travel (such as depreciation, maintenance and fuel).
Advisory Fuel Rates
HM Revenue & Customs also sets tax-free mileage allowance rates just to cover fuel costs ('Advisory Fuel Rates') or 'AFRs' incurred by employees on business motoring.
The mileage rates vary according to the type of fuel for the car and the size of the car's engine.
These mileage rates can be paid tax-free, typically where:
||An employee has a company car and is being reimbursed for fuel costs on business travel.
||An employee already receives a cash allowance instead of a companycar and is just being reimbursed for fule costs on business travel.
What if I Receive a Cash Allowance?
If you receive a monthly or annual cash allowance, or a mixture of a cash allowance and a mileage based allowance, you can still claim tax relief based on the AMAPS rates for the business miles you travel.
AMAPS Tax Relief Example
Let's say you travel 20,000 business miles each tax year and your receive from your employer;
||a fixed cash allowance of £5,000pa; plus
||10ppm for each business mile travelled, total £2,000pa (20000 business miles @ 10ppm).
Your employer's contribution towards your business motoring costs would then be £5,000 plus £2,000, a total of £7,000pa.
Your tax relief under AMAPS would be:
||first 10,000 miles x 45p = £4,500, plus
||remaining 5,000 business miles at 25ppm = £1,250;
a total of £5,750 tax relief.
As your employer pays you a total of £7,000pa and your tax relief is £5,750, out of the £7,000 you receive from your employer you would pay tax on £1,250 (£7,000 - £5,750).
What if I Don't Receive Any Allowances?
You do not have to actually receive a cash allowance or the AMAPS allowances to benefit from them.
For example, if you receive only your salary, or your employer pays you a mileage allowance that is lower than the AMAPS rate, you can opt to claim tax relief for business use of your own car using AMAPS rates.
Let's say you travel 20,000 business miles in your own car during the tax year and do not receive a tax-free mileage allowance from your employer - you could then claim tax relief by reference to 10,000 miles at the full AMAPS rate and 10,000 miles at the lower rate.
Alternatively, if your employer paid you a tax-free mileage allowance of only 20pence per mile for all business mileage you could claim tax relief on the difference between the total due under the AMAPS rates and the actual mileage allowance received each tax year.
Can I Claim Tax Relief In Advance Under PAYE?
You do not need to wait until the end of the tax year to claim tax relief under the AMAPS system.
You can make an advance claim at the beginning of the tax year for your Pay As You Earn ('PAYE') code number to be adjusted to take account of AMAPS. This can be useful if your employer pays you a monthly allowance with tax deducted (and perhaps also National Insurance Contributions) under the PAYE system.
To make a claim in advance for tax relief under PAYE, simply provide your tax office with an estimate of your business mileage for the tax year and ask for your PAYE code number to be adjusted to take account of the AMAPS relief to which you expect to be entitled for tax year.
Your tax code number will then be increased by the estimated tax relief due to you, which will reduce the tax that you pay through the PAYE system, in effect, giving you 1/12th of your AMAPS tax relief each month.
What About National Insurance Contributions?
Normally the payment of AMAPS allowances within the requirements of HM Revenue and Customs' rules will qualify for exclusion from National Insurance Contributions.
In strictness, for NIC purposes there is no upper threshold on mileage for paying the full rate of AMAPS allowance, though in practice employer's rarely operate a separate approach to tax and NIC as far as AMAPS is concerned.