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Car Allowance vs Mileage Allowance – What’s best for employees?

12/08/2020

Business person driving

When it comes to giving your employees the chance to take advantage of a company car or mileage allowance, they can both be an attractive benefit for your staff. That said, whilst they’re both valuable perks of the job, as an employer, you need to ensure you’re managing a company car allowance scheme the right way and according to HMRC rules.

HMRC have placed a strict contrast in the way in which both work and it’s really important that you decide which system is the best option for both you and your employees. If you don’t, there’s a real possibility that you could pay too much tax, or you could even become non-compliant with tax authorities if you don’t meet your obligations.

Which brings us to the ultimate question. Should you use car allowance or seek to claim your mileage tax back?

Choice #1: Car Allowance

If you’re looking to take advantage of this option, your car allowance scheme should be administered via PAYE on a monthly basis, where it becomes subject to tax and National Insurance. Ultimately, this means that you and your employees will need to pay tax on the car allowance. How much will be taken is down to what the person earns, their income threshold.

An alternative to having the car allowance deducted on a monthly basis is to take it off their gross annual salary. Usually a company would agree to this during the interview / recruitment stage of hiring a new member of staff, so your new employee knows what has already been deducted from their overall “package” and won’t appear on the payslip

Choice #2: Mileage Allowance

Covering the cost of fuel, as well as wear and tear for any strictly business journeys, mileage allowance is a great benefit to have. Making a claim for business mileage can only be made if you use your own personal vehicle for work purposes. Unfortunately, if you already have a company car, you won’t be able to claim your mileage tax back in addition.

Additional mileage allowance will be at the discretion of the employer, as the role of the employee may differ with regard to the use of the car. For example, a regional manager may have to travel across the country on a regular basis, clocking up over 1k miles a month on a car allowance of £600, which alone, might not be enough to cover all the business miles that have been travelled.

You can claim business mileage back annually and mileage allowance is also tax free up to a certain number of miles, according to HMRC. The amount you get will depend on your vehicle too. See below 👇

mileage amounts table

So, what does this mean. Which one is the best? Well, both options are great benefits and really, it’s up to the employer to think of what would be best for their staff. If employees don’t want to see money coming off their payslip every month, potentially earn a lower annual wage it might be best to claim mileage tax. However, if you want to have a branded fleet of cars, a car allowance might be best.

If you’re not currently on a company car allowance scheme and want to see if you’re eligible to get some money back for the business miles you travel, hop over to our free and instant online estimate calculator to see what you could be owed.