Do you frequently travel to client locations? If so, are you currently taking advantage of mileage allowances? Mileage allowances are a qualifying business expense, providing you with tax-free reimbursements and lowering your business’s taxable income.
This tax advantage benefits all business owners, including self-employed individuals. In this article, we’ll cover the basics of mileage allowances, including the allowable limits set by the UK Government and how you can maximize compliance with reporting requirements.
Eligibility and rules
The UK Government allows business owners and employees to claim mileage allowances if personal vehicles are used for business-related purposes. Vans, motorcycles, cars, and bicycles are all considered vehicles for mileage allowance purposes.
Eligible mileage includes travel from work to client locations. Travel from home to work is not eligible. This means that employees who travel from their home to the office cannot claim a mileage reimbursement. There is an exception to this rule if your office is in your home. For example, many self-employed individuals work out of a space in their home. In this case, travel from your home to client locations would be eligible.
Additionally, temporary work locations can also trigger mileage allowance. For example, if you are staying in a hotel for a business meeting, travel from the hotel to a client location would be eligible.
Rates and calculation
Business owners can pay employees, including themselves, Mileage Allowance Payments (MAPs). The UK Government allows payments of MAPs up to a certain amount each year without having to report them to HMRC. Let’s go through the reimbursements for each vehicle class.
- Cars and Vans – First 10,000 miles at 45p per mile. Mileage over 10,000 at 25p per mile.
- Motorcycles – All mileage at 24p per mile.
- Bicycles – All mileage at 20p per mile.
Employees riding in the passenger seat can also claim a mileage allowance at 5p per business mile. The mileage reimbursement is based on the type of transportation used. For example, let’s say that your employee drove 5,000 miles in one car and 2,000 in another. All mileage will be calculated at 45p.
Mileage allowance given to employees over these stated benchmarks creates taxable income for your employee. For example, let’s say that you give your employees a 50p mileage reimbursement for cars and vans. If your employee drove 1,000 miles, you would be required to add 5,000p of taxable income to their pay.
The opposite effect is also true. Employees can claim tax relief for mileage allowances under the set rate. If you were to pay your employees 40p per mile under 10,000, your employees could claim an additional deduction up to the allowable rate on their individual tax return.
Record-keeping requirements
Documentation is required for mileage allowances. For one, employees should follow a streamlined expense reporting process. This generally involves submitting proof of the mileage within a certain time frame. Once approved, the mileage allowance will be paid out through payroll.
Each mileage transaction should have supporting documentation, including the date of travel, the miles traveled, the purpose of the travel, and the vehicle used. Having a mileage log for each employee supports the tax-free reimbursement in the event of an audit. If you are reimbursing employees for other expenses, like fuel and repairs, you should have receipts and invoices for each transaction.
Documentation is not only beneficial from an audit standpoint, but it’s also crucial to reduce your risk of expense claim fraud. A recent study found that nearly 1 in 4 employees have committed expense fraud. Paying out fictitious mileage allowances can hurt your profitability and growth opportunities.
Reimbursement or Deduction
Both employers and self-employed business owners can leverage mileage expenses. If you are reimbursing yourself through payroll, the reimbursement will follow a similar process as other employees. First, you will submit all of your expenses with documentation. Then, the reimbursement will be issued through payroll. When it comes time to file your business taxes, you will report the reimbursements as a deduction from your business income.
However, if you are self-employed and do not run payroll, the reimbursement process will be different. In fact, you will not receive a reimbursement through payroll, and you will claim all mileage allowance when you file your tax return. Generally, this will involve using the allowable mileage rates, with no over or under payments.
Technology and Tools
Tracking mileage allowances is an important component of issuing tax-advantaged reimbursements. There are a few different processes and policies you want to have in place. For one, you want to have a defined process for expense claims. A sample process might include:
- Document Expense – Employees will upload a mileage log each week or month into an expense management system. Another option is to track mileage using a tracking app that connects to Google Maps, like N2F.
- Submit Reimbursement Request – After the reporting period has closed, the employee will review their mileage log and submit the report for review and approval.
- Approval – The in-charge manager or owner will review the report and approve the mileage allowance.
- Payment – The mileage allowance will be paid out at a predetermined rate on the next payroll run.
When streamlining your mileage allowance process, it’s important to invest in the right technology. A robust mileage tracking platform gives your employees the resources needed to track mileage in real-time using Google Maps. After each trip, the employee’s mileage log will be updated, ensuring every trip is tracked.
Your mileage tracking platform should provide flexibility for your employees. This is why it’s best to choose a program that has a mobile app that employees can use on the go. Additionally, your mileage expense management software should be able to integrate with your accounting software to provide transparency in payments.
Summary
Are you currently offering mileage allowances to employees? How about taking advantage of this tax break for miles driven as a self-employed individual? Whether you are looking to rework your existing mileage allowance program or start from scratch, the right resources can make all the difference. Contact our team at N2F today to schedule your free consultation.
