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Mileage Allowance Planning

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With the ever increasing tax cost of providing a company car, many employers are instead providing a car allowance and getting the employee to purchase the car using it.

Salary by another name

The key point to remember is that car allowance is just salary by another name. As such, the amount of car allowance paid will be subject to tax, national insurance, and employers national insurance.

To take account of the fact that a car allowance is provided, many employers then reduce the amount of the business mileage payment they make to the employee. Typically, they pay the HMRC advisory fuel rate which is a lot less than the HMRC Authorised Mileage Allowance Payment (AMAPS).

As the employee is the owner of the car (as opposed to the company), then they are actually entitled to the full AMAP payment, currently 45p/mile for the first 10,000 miles for a petrol car (other rates available here).

If, in the above scenario, a lesser amount per mile is paid, then the employee can make a separate claim to HMRC for the difference against their employment income and in many cases can receive a refund. The further good news is that this claim can also be backdated if need be.

There is also more good news.

With a little planning on the car allowance and mileage payments, both the employer and employee could benefit within the tax year rather than having to wait until it is finished.

This is the way it would work:

1) Establish the business mileage carried out by an employee and pay them the existing fuel only advisory mileage rate as normal.

2) Calculate the difference between what the payment would have been using AMAP and the advisory fuel rate. This is the further amount the employer can pay the employee tax and national insurance free.

3) Pay the amount calculated in 2) as an enhanced mileage payment.

4) Deduct the amount calculated in 2) from the car allowance and then tax the remainder normally.

This will give the employee an immediate tax and national insurance saving. It will also reduce employer's national insurance.
e.g.

Higher rate tax payer
£2,000 car allowance paid each month
1,000 business miles travelled each month
12p/mile fuel advisory rate
45p/mile AMAP rate

Following the steps above:

1) 1,000 x £0.12 = £120
2) 1,000 x (£0.45 – £0.12) = £330

4) Balance of car allowance to pay £2,000 less £330 = £1,670

Employee monthly savings: (£330 x 40%) + (£330 x 2%) = £138.60/month
Employer monthly savings (£330 x 13.8%) = £45.54/month

Employee Annual Saving: £1,663.20
Employer Annual Saving: £546.48

A simple yet effective way of making further savings when providing a car for employees.

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