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Cutting Your Tax Bill on Mileage Allowances

By: J.A.J Aaronson - Updated: 5 Sep 2012 | comments*Discuss
 
Tax Relief Bill Mileage Allowance

From a tax point of view, self-employment can seem like an impossibly complicated situation. Although self-assessment has been simplified in recent times, it is still far more complex than PAYE. Furthermore, if you are VAT registered then you will have an extra set of accounting considerations.

In an effort to encourage the development of small business, HM Revenue and Customs (HMRC) offers a series of Tax Relief packages to those who are either self-employed or operate as a sole trader or within a partnership. One of the most commonly overlooked of these packages is mileage allowance relief. You may also wish to read on if you are an employee who is given a Car Allowance by their employer, as this article also looks at ways in which you too can save money on your tax bill.

What is Mileage Allowance?

In the first instance, it is important to understand exactly what is covered under mileage allowances. This form of tax relief is designed to help towards the costs of travel for business purposes. If, for example, you are a PC repairman who is required to make house calls, then you would be able to claim tax relief on the miles that you drive to each of those calls and back. It is important to note, however, that journeys between your home and your place of work do not qualify for tax relief.

The first step towards claiming this relief is to keep as detailed a set of records as you possibly can covering each business journey that you make. This should include the number of miles travelled, the purpose, and the date. This will prove vital both at the end of the accounting year when you calculate how much relief you think you are entitled to, and also if your figures are disputed by the Inland Revenue.

Self-Employed and Employers

Currently, the Inland Revenue operates their mileage allowance scheme on a basis of 45 pence per mile travelled. This rate applies only for the first 10,000 miles travelled in a year, however, after which point the rate falls to 25 pence per mile. If, for example, our PC repairman travelled a total of 16,000 miles during the course of a year, he should file an application for mileage allowance relief on a sum of £6,000. This is broken down as £4,500 for the first 10,000 miles at 45 pence per mile, and £1,500 for the subsequent 6,000 at a rate of 25 pence per mile. This application should be made to the Inland Revenue on form P87, and the refund should be received at the end of the tax year.

Employees

Tax relief on mileage allowances is also a consideration for employees. Imagine, for example, that our PC repairman’s business expanded, and he found that he needed to employ another member of staff to complete the jobs that he couldn’t fit in. The employer decided that he would pay his new employee a mileage allowance of 60 pence per mile to cover petrol and other running costs. In this case, the employee is being paid above the Inland Revenue’s accepted rate, and so the excess is considered to be a part of the salary. If the employer is providing the vehicle, then this excess will be taxed in exactly the same way as the rest of the salary.

However, if you are an employee and you provide your own method of transport, you can claim tax relief at the same rate as your employer. If, for example, you travel 15,000 miles over the course of a year, you can claim relief on a sum of £5,750, broken down as 10,000 miles at 45 pence per mile and 5,000 miles at 25 pence per mile. If, on the other hand, your employer pays you a mileage allowance which is below these rates, you can only claim relief on the difference between the two rates.

Finally, as an employee, it is also worth remembering that you can claim relief on allowances for the previous six years. If, therefore, you are only just discovering this form of tax relief, ask your tax office for the relevant forms to make a claim for any past years.

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