For those employers who wish to offer a car allowance to their UK based employees, there is a strict differentiator between a car allowance (which is processed on a monthly basis and subject to PAYE and calculated through payroll) and mileage reimbursement. The Car allowance vs mileage allowance for UK employees usually happens at the beginning of an employer taking on its UK based employee.
Another option – clients will ask our opinion whether they should provide a company car or provide the employee with a monthly car allowance. Without going into the tax implications, it is easier for the company and the employee to receive a car allowance on a monthly basis vs. a company car. That said, if you are a larger employer in the UK – then it may be you have access to a group scheme of company cars and this does not apply. Most UK start-up’s/SME’s will not however.
How is a car allowance treated for payroll?
If the car allowance is to be processed as an additional item through UK payroll, which is should be – it is such subject to PAYE and employers National Insurance which is currently at 13.8%. This means the employee will pay tax on the car allowance, at varying rate – depending on their income threshold.
The other option is to build the car allowance aspect into the employees’ gross salary. This is generally done prior to employment as part of the employee/employer negotiation. This means that the car allowance aspect has already been considered as part of the employees’ overall package and would not appear as an additional line-item on the payslip. This would be clearly stated as part of the negotiation from the employer perspective.
Is a car allowance a P11D Reportable benefit?
No – the car allowance has already gone through PAYE (Pay As You Earn) – and tax of the employer’s. It does not need to be reported. A P11D is required to be completed for those non-cash benefits in kind (BIK).
What about a mileage allowance?
A mileage allowance covers the costs of fuel and wear and tear for business journeys. As an employer, it is your discretion as to whether you offer the mileage allowance in addition to the car allowance. This is role /transport specific. If you have a country manager with a car allowance of £500, who travels at least 1000miles per month, it could be argued that it is unreasonable to expect the car allowance aspect alone to cover the business miles travelled.
You can claim a mileage allowance if you use your personal vehicle for work. Employee’s should not claim a full mileage allowance if they use a company car.
Unlike a car allowance, a mileage allowance is tax free, but only if it doesn’t exceed a threshold called the approved HMRC rates/threshold. These are:
Vehicle Type Up to 10,000 Miles Over 10,000 Miles
Cars and vans 45p per mile 25p per mile
Motorcycles 24p per mile 24p per mile
Bikes 20p per mile 20p per mile
Fuel rates for a company car
Employees can claim a mileage allowance if they use their company car, but the fuel rates are much lower.
Engine size Petrol – amount per mile LPG – amount per mile
1400cc or less 11p per mile 7p per mile
1401 to 2000cc 14p per mile 9p per mile
Over 2000cc 22p per mile 14p per mile
Of course, the employer could offer slightly lower rates per mile. For further detail concerning running a UK payroll, please see this article.