HMRC is being urged to increase its car mileage rates in line with inflation, in a bid to relieve some of the financial burden amid rising energy bills, inflation and interest rates.

Under the current scheme, employees travelling on business using their own vehicle can be reimbursed 45p per mile on the first 10,000 miles and 25p per mile for the remaining miles in a tax year. The mileage allowance is designed to not only reimburse employees the fuel for using their own cars, but also considers other factors including road tax, repairs, and servicing/MOTs.

Dave Hedges, Tax Partner at Azets, says:

“The energy price cap has risen and a reduction in oil prices has yet to be fully felt at the pumps. This, as well as a rise in almost every other bill, has led to millions of households struggling to cope. World events beyond our control have exasperated the situation and impacted supply chains, which has subsequently resulted in higher prices. We have seen a slight reduction in prices in recent weeks – but still only marginally down from historic highs. This could take years to stabilise – and an updated mileage rate model is required to ensure that it accurately reflects the dynamic market.”

The current 45p per mile rate was introduced in 2011 when petrol cost an average of £1.33 per litre and diesel was £1.38. In 2022, with motorists facing an average of £1.73 per litre for petrol (a 30% increase) and £1.84 per litre for diesel (a 33% increase), the tax-free 45p per mile has remained static.

This is coupled with car list price inflation – for example, a new Vauxhall Corsa has increased in price from c£10k to c£16k.

A fairer system, it has been maintained, would be for the mileage allowance to increase in line with inflation, with the Government ban on new petrol and diesel cars not due until 2030.

Businesses going above and beyond the HMRC approved mileage allowance rates to help cover the higher cost of fuel could be negatively impacting employees in the form of more tax.

Continued Hedges:

“With the cost of living still increasing rapidly, the Government must amend the mileage allowance so that much of the UK workforce is not out of pocket. There are nearly half a million electric cars in the UK, and higher fuel prices have prompted more people to consider making the switch. However, the increased fuel prices have created a current problem that requires an immediate solution now for those employees who either do not wish to or are unable to move away from the internal combustion engine. Employers could look to provide their employees with company cars or increase the travel reimbursement per mile to the employee. However, if an employer reimburses an employee more than the mileage allowance, the extra amount counts as earnings and is taxed accordingly.”

The cost of driving is also hitting the public sector. The union UNISON says staff are effectively subsidising their employers, ​because they are paying much more for petrol than they can claim back, especially as ​fuel prices remain so high.

A separate UNISON survey of health staff and those employed by organisations providing NHS services has highlighted how they rely on ​their own vehicles to do their jobs. Findings based on 550 staff show the vast majority (91%) of those who drive a car at work use their own vehicle. More than two in five (44%) of these travel over 4,000 miles a year for work, including some ​who clock up more than 10,000.

An overwhelming number of staff (95%) of staff who drive for work are required to do so as part of their contract. More than a fifth (24%) say they are unable to use public transport ​to do their jobs, either because none is available or ​doesn’t run at suitable times. ​Around one in six (18%) say they ​need to carry heavy or dangerous equipment when they drive for work. Despite needing to use their cars, more than nine in ten (94%) say the current mileage reimbursement rate does not cover their actual driving costs.

UNISON general secretary, Christina McAnea, said:

“Staff can’t carry on putting their hands in their pockets like this. No one should have to pay to ​work, especially those providing vital services. Many will end up quitting the public sector altogether because of wholly inadequate mileage rates. They simply can’t afford the petrol to do their jobs, on top of huge bills and ​other rising living costs. The government must take action now by increasing rates so staff aren’t subsidising their employers.”