Go back to insightsA Long-Overdue Thaw in Mileage Rates
One of the measures announced as part of the Chancellor’s ‘Great British Summer Saving‘ package was a welcome increase in the tax-free mileage allowance for employees using their own vehicles for business travel.
HMRC’s approach to business motoring has long highlighted a contrast between the treatment of company cars and personally owned vehicles.
Company Cars
The days when employers routinely provided both a company car and unlimited fuel for private use are largely behind us. The reason is straightforward: the tax and National Insurance (NI) charges associated with the fuel benefit are often prohibitively expensive.
In many cases, both employers and employees are financially better off if:
- The employer reimburses fuel used for business journeys; and
- The employee pays personally for any private motoring.
For example, a higher-rate taxpayer driving a company BMW 320i could face an annual tax charge of almost £4,100 on the fuel benefit in 2026/27. At current fuel prices, that sum would purchase over 2,600 litres of petrol, making the benefit difficult to justify.
To simplify matters, HMRC publishes Advisory Fuel Rates (AFRs) each quarter. These rates cover petrol, diesel, LPG and electric vehicles, with allowances varying according to engine size and, in the case of electric vehicles, whether charging takes place at home or via public charging points.
Where an employer reimburses fuel costs at or below the relevant advisory rate, there is generally no tax or NI liability for the employee.
One notable anomaly remains: employees with company-provided electric cars do not currently face a taxable benefit when their vehicle is charged at the employer’s expense, such as at a workplace charging point.
Personally Owned Vehicles
The position is far less sophisticated for employees using their own cars for business travel. HMRC’s approved mileage rates make no distinction between vehicle type, fuel source or engine size.
Until the Chancellor’s recent announcement, the rates had remained unchanged since April 2011:
- 45p per mile for the first 10,000 business miles each tax year.
- 25p per mile for any additional business mileage.
- 5p per mile for each qualifying business passenger.
As part of the government’s latest cost-of-living measures, the main mileage rate has been increased to 55p per mile, with the change backdated to 6 April 2026.
While the increase is undoubtedly welcome, it is worth putting it into context. The 10p rise represents an increase of 22.2%, whereas consumer price inflation over the same 15-year period has totalled approximately 52.5%.
Better Late Than Never
The updated mileage allowance provides some additional support for employees who regularly use their own vehicles for work. However, the prolonged freeze serves as another reminder of how inflation can gradually erode the value of tax allowances and thresholds when they remain unchanged for long periods.
While the recent increase is a step in the right direction, many would argue it simply reflects a long-overdue adjustment rather than a significant enhancement of the existing system.
Tax treatment depends on individual circumstances and may change in the future.
The Financial Conduct Authority does not regulate tax advice.