Car allowance vs mileage allowance for UK employees

Providing your employees with a company car can be a worthwhile and valuable staff benefit. However, while it’s an attractive perk for employees, you need to make sure that you are running your company car allowance scheme correctly according to HMRC rules.  

Under the current rule, 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. 

It’s really important to decide which scheme is right for you to make sure your staff get the right benefit and you don’t pay either too much tax or, just as bad, fail to meet your obligations and fall out of compliance with the tax authorities.  

Option 1: Car Allowance:  

Car allowance should be processed through your PAYE system, where it is subject to PAYE and employers National Insurance (currently 13.8%). This means the employee will pay tax on the car allowance, at varying rate – depending on their income threshold. 

Alternatively, you might want to roll the car allowance into the employee’s gross salary. This is generally done prior to employment as part of the recruitment 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. 

Option 2: Mileage Allowance 

A mileage allowance covers the costs of fuel and wear and tear for business journeys. You can claim a mileage allowance if you use your personal vehicle for work. Employees should not claim a full mileage allowance if they use a company car. 

As an employer, it is up to you whether you offer a mileage allowance in addition to the car allowance. Each role may differ in terms of its car needs: for instance, if you have a country manager who travels at least 1000 miles per month on a car allowance of £500, it may not be reasonable to expect the car allowance aspect alone to cover the business miles travelled.  

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: 

For further detail concerning running a UK payroll, please see this article.