Severn Accounting
Tax & Accounting

Tax implications of paying mileage payments of more than the

By Ali Jaw ·

Many business owners and employees use their own vehicles for work purposes, and the question of how to reimburse mileage expenses often causes confusion. HMRC provides generous allowances for this, but what happens when you pay more than the official rates? Understanding the tax implications is crucial to keeping your business compliant and your employees happy.

The HMRC mileage allowance relief rates

HMRC sets approved mileage allowance relief rates, which currently stand at:

  • 45p per mile for the first 10,000 miles in a tax year
  • 25p per mile for any miles above 10,000 miles

These rates apply to cars and vans. The key advantage is that payments up to these thresholds are entirely tax-free for employees and don’t count as a taxable benefit. For employers, the expense is deductible from corporation tax.

For motorcycles, the rate is 24p per mile, and bicycles attract 20p per mile.

What happens if you pay above the approved rates?

If you reimburse employees at rates higher than HMRC’s approved allowances, the excess becomes taxable. This is where many businesses inadvertently create a tax problem.

For example, if you pay an employee 50p per mile but HMRC’s approved rate is 45p per mile for the first 10,000 miles, that extra 5p per mile is treated as additional earnings. This means:

  • It’s subject to income tax at the employee’s marginal rate
  • National Insurance contributions apply (both employee and employer contributions)
  • The employee must declare this on their Self Assessment return
  • You must report it through payroll via PAYE

In practical terms, paying 50p per mile instead of 45p might only seem like a small gesture, but over thousands of miles, it quickly becomes a significant tax liability for both parties.

Recording and reporting arrangements

Proper documentation is essential. You must keep contemporaneous records showing:

  • The dates of journeys
  • Business purpose of each trip
  • Miles travelled on each occasion
  • The rate paid per mile

HMRC isn’t necessarily looking for minute-by-minute logs, but a reasonable mileage record is important. Many employers use simple spreadsheets or mileage tracking apps to maintain this evidence.

If you’ve been paying above the approved rates, you should report any excess as additional employment income through your payroll software. Your accountant can help ensure this is calculated correctly and reconciled with your tax records.

The alternative approach: actual expenses

Some employers choose to use the actual expenses method instead. This allows you to reimburse employees based on their genuine costs—fuel, maintenance, insurance, depreciation—rather than using HMRC’s allowance rates.

The advantage here is flexibility: if an employee’s actual running costs exceed 45p per mile (perhaps they drive a larger vehicle), reimbursing those genuine costs may be more cost-effective. However, this route requires meticulous record-keeping and substantiation of all expenses.

Most smaller businesses find the approved mileage rates simpler and cleaner. They avoid the administrative burden of tracking actual costs and provide certainty for both employer and employee.

Practical recommendations

If you currently pay above HMRC’s approved rates, consider these steps:

Review your current arrangements. Calculate what you’re actually paying and compare it against HMRC’s thresholds. Work out any tax liability that might arise.

Communicate with your team. If you decide to align with HMRC rates going forwards, explain the reasoning. Most employees understand the tax position once it’s properly explained.

Update your payroll. Ensure your payroll software is configured to report any excess payments correctly. Missing this could trigger an HMRC compliance enquiry.

Keep records going forwards. Whether you use approved rates or actual expenses, documentation is your friend. It protects both you and your team.

The bottom line is straightforward: stick to HMRC’s approved rates, document your mileage, and you’ll sleep soundly knowing the arrangement is tax-compliant. If you do choose to pay more, ensure it’s properly recorded and reported through your payroll.

For tailored advice, contact Severn Accounting — we’re here to help.