HMRC Authorised Mileage Scheme (AMS) is a popular area in all the tax exams. It applies to employees who use their own cars for business travel and are then reimbursed by their employer.
The rates are 45p per mile for the first 10,000 business miles and just 25p a mile thereafter.
If the employer pays the employee the approved rates, the amount received is completely tax free.
If the employer pays the employee more than the AMS rates, the employee is taxed on the excess amount as taxable earnings.
Leila gets 50p a mile and does 5000 business miles a year. This means that she will have taxable earnings of 5000 x (50-45p) or £250. This is subject to both income tax and employee Class I NIC.
If an employer pays the employee less than the approved rates, the employee can claim for the deficit as an allowable deduction from the earnings.
Jason gets 35p a mile and does 10000 business miles a year. This means that he can deduct an expense of 10000 x (45-35p) or £1000 from his salary.
Where the employer pays a mileage allowance in excess of the AMS rates, this must be reported on the P-11D, and the excess amount is subject to employer’s Class 1 NIC at 13.8%.
The important aspect here is the 45p applies to ALL MILES even in excess of 10,000 miles.
ABC Ltd pays a mileage allowance of 60p to an employee who does 12000 miles.
The employer’s NIC is 12000 x (60-45p) x 13.8% = £248.
The approved mileage scheme is also used by self-employed individuals or landlords with a turnover of under £150,000 a year that operate the cash basis instead of the accruals basis.
This allows them to claim a deduction for their business miles in a simplified manner instead of having to apportion their use of a car between business and private use.
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